NORWOOD FINANCIAL CORP
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WWW.WAYNEBANK.COM
2018 | ANNUAL REPORT
...WE ARE PLEASED TO HAVE ACCOMPLISHED
THE GOALS WE SET FOR 2018 AND CONTINUED
OUR TRADITION OF BEING A PILLAR IN THE
COMMUNITIES WE SERVE THIS YEAR.
LEWIS J. CRITELLI
President and CEO
DEAR STOCKHOLDERS,
We are pleased to share with you the Company’s performance and
Wayne Bank employs over 200 local people who are passionate about
achievements in this Annual Report. Your Company had a very
helping their communities grow, and their efforts have resulted in
productive year with a record level of earnings, 11.3% growth in loans,
record growth across our organization. In 2018, our in-office network
improvement in credit quality metrics and enhancements in operating
generated almost 1,200 mortgage, home equity, and other personal
efficiencies. We also increased our cash dividend in the fourth quarter
loans totaling $50 million, our business lending division originated
of 2018, 9.1% as compared to the fourth quarter of 2017. This
over $100 million in commercial loans, and our dealer center
marks 26 consecutive years of an increase in the Company’s cash
produced auto loans totaling $63 million.
dividend, truly an impressive record. In addition, we opened our new
community office in Roscoe, NY, announced plans to establish our
first office in Luzerne County, PA and enhanced our various electronic
banking channels.
One of the year’s achievements was the relocation of the Bank’s
Roscoe Community Office. In May, the Roscoe staff moved into
their freshly renovated office, conveniently located across the street
from the old location. The new Roscoe Community Office also offers
For the year ended December 31, 2018, the Company earned a
improved parking, enhanced visibility, and exciting technological
record $13,651,000, an increase of $5,453,000 or 66.5% from
upgrades. The move has been an extremely positive one and a grand
the $8,198,000 earned in the prior year. The increase reflects
opening event and ribbon cutting was held in August to celebrate.
improvement in net interest income and other income, as well as a
reduction in the provision for loan losses. Income tax expense was
reduced $3,998,000 due to the non-recurring expense recognized
in 2017 combined with the impact of the reduced corporate tax
rate, both which were the result of the Tax Cuts and Jobs Act. In
2018, income before tax improved $1,455,000 or 9.9%. For the
year, earnings per share on a fully diluted basis were $2.17 for 2018
compared to $1.31 in 2017. The return on average assets for the
year was 1.19% with a return on average equity of 11.71% compared
to 0.73% and 7.04%, respectively, in 2017. Total assets were $1.2
Expansion has been a positive theme throughout Wayne Bank’s
history, and in 2018, the exciting decision was made to expand
into Luzerne County, Pennsylvania. Regulatory approval was received
to establish a new, full-service Community Office in Hanover
Township, marking the bank’s entry into the Luzerne County
marketplace. This expansion will offer new market opportunities
for both deposit gathering and lending facilities, particularly in our
commercial lending division. The new Community Office is slated
to open during the Second Quarter of 2019.
billion as of December 31, 2018. Loans receivable increased $86.1
Our electronic banking platform has continued to evolve and now
million to total $850.2 million as of December 31, 2018, with
offers customers a full suite of products and services to allow for
total deposits of $946.8 million and stockholders’ equity of $122.3
banking from anywhere. At the end of the fourth quarter, Online
million. I encourage you to read The Management’s Discussion and
Banking users totaled almost 15,000, Mobile Banking was enjoyed
Analysis and the Financial Statements with Footnotes for a full report
by over 20,500 customers, 3,900 individuals and businesses were
using Mobile Deposit Capture, and over 9,700 deposit customers were
enrolled for eStatements.
on our performance.
Founded in 1871, Wayne Bank celebrated 147 years of community
banking in 2018. Thanks to the dedication of our employees, the
loyalty of our customers, and the support of our local communities,
we are pleased to have accomplished the goals we set for 2018 and
continued our tradition of being a pillar in the communities we serve
this year.
Our 25 Community Offices serve the people of Northeastern
Pennsylvania and the Southern Tier of New York throughout six
counties. Although these counties are each very geographically and
demographically unique, they are all comprised of communities
made up of hard-working residents, friendly neighborhoods, exciting
businesses, enriching schools, and vital organizations. Wayne Bank is
proud to be an important part of each of these wonderful communities.
147 YEARS IN BUSINESS, WITH
25 COMMUNITY OFFICES AND
OVER 200 EMPLOYEES.
COMING SOON IN 2019 — HANOVER TOWNSHIP, PA
WAYNEBANK.COM
Shohola, PA
Milford, PA
PIKE COUNTY
Tannersville, PA
Stroud Mall (Stroudsburg), PA
Marshalls Creek, PA
Effort, PA
MONROE COUNTY
Clarks Summit, PA
Central Scranton, PA
LACKAWANNA COUNTY
Wurtsboro, NY
Roscoe, NY
Narrowsburg, NY
Monticello, NY
Liberty, NY
Callicoon, NY
SULLIVAN COUNTY
Walton, NY
Roxbury, NY
Hamden, NY
Franklin, NY
Andes, NY
DELAWARE COUNTY
Stamford, NY
Willow Avenue (Honesdale), PA
Waymart, PA
Lakewood, PA
Honesdale, PA
Hawley, PA
WAYNE COUNTY
NORWOOD FINANCIAL CORP
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...WE ARE PLEASED TO HAVE ACCOMPLISHED
THE GOALS WE SET FOR 2018 AND CONTINUED
OUR TRADITION OF BEING A PILLAR IN THE
COMMUNITIES WE SERVE THIS YEAR.
DEAR STOCKHOLDERS,
We are pleased to share with you the Company’s performance and
achievements in this Annual Report. Your Company had a very
productive year with a record level of earnings, 11.3% growth in loans,
improvement in credit quality metrics and enhancements in operating
efficiencies. We also increased our cash dividend in the fourth quarter
of 2018, 9.1% as compared to the fourth quarter of 2017. This
marks 26 consecutive years of an increase in the Company’s cash
dividend, truly an impressive record. In addition, we opened our new
community office in Roscoe, NY, announced plans to establish our
first office in Luzerne County, PA and enhanced our various electronic
banking channels.
For the year ended December 31, 2018, the Company earned a
record $13,651,000, an increase of $5,453,000 or 66.5% from
the $8,198,000 earned in the prior year. The increase reflects
improvement in net interest income and other income, as well as a
reduction in the provision for loan losses. Income tax expense was
reduced $3,998,000 due to the non-recurring expense recognized
in 2017 combined with the impact of the reduced corporate tax
rate, both which were the result of the Tax Cuts and Jobs Act. In
2018, income before tax improved $1,455,000 or 9.9%. For the
year, earnings per share on a fully diluted basis were $2.17 for 2018
compared to $1.31 in 2017. The return on average assets for the
year was 1.19% with a return on average equity of 11.71% compared
to 0.73% and 7.04%, respectively, in 2017. Total assets were $1.2
billion as of December 31, 2018. Loans receivable increased $86.1
million to total $850.2 million as of December 31, 2018, with
total deposits of $946.8 million and stockholders’ equity of $122.3
million. I encourage you to read The Management’s Discussion and
Analysis and the Financial Statements with Footnotes for a full report
on our performance.
Founded in 1871, Wayne Bank celebrated 147 years of community
banking in 2018. Thanks to the dedication of our employees, the
loyalty of our customers, and the support of our local communities,
we are pleased to have accomplished the goals we set for 2018 and
continued our tradition of being a pillar in the communities we serve
this year.
Our 25 Community Offices serve the people of Northeastern
Pennsylvania and the Southern Tier of New York throughout six
counties. Although these counties are each very geographically and
demographically unique, they are all comprised of communities
made up of hard-working residents, friendly neighborhoods, exciting
businesses, enriching schools, and vital organizations. Wayne Bank is
proud to be an important part of each of these wonderful communities.
LEWIS J. CRITELLI
President and CEO
Wayne Bank employs over 200 local people who are passionate about
helping their communities grow, and their efforts have resulted in
record growth across our organization. In 2018, our in-office network
generated almost 1,200 mortgage, home equity, and other personal
loans totaling $50 million, our business lending division originated
over $100 million in commercial loans, and our dealer center
produced auto loans totaling $63 million.
One of the year’s achievements was the relocation of the Bank’s
Roscoe Community Office. In May, the Roscoe staff moved into
their freshly renovated office, conveniently located across the street
from the old location. The new Roscoe Community Office also offers
improved parking, enhanced visibility, and exciting technological
upgrades. The move has been an extremely positive one and a grand
opening event and ribbon cutting was held in August to celebrate.
Expansion has been a positive theme throughout Wayne Bank’s
history, and in 2018, the exciting decision was made to expand
into Luzerne County, Pennsylvania. Regulatory approval was received
to establish a new, full-service Community Office in Hanover
Township, marking the bank’s entry into the Luzerne County
marketplace. This expansion will offer new market opportunities
for both deposit gathering and lending facilities, particularly in our
commercial lending division. The new Community Office is slated
to open during the Second Quarter of 2019.
Our electronic banking platform has continued to evolve and now
offers customers a full suite of products and services to allow for
banking from anywhere. At the end of the fourth quarter, Online
Banking users totaled almost 15,000, Mobile Banking was enjoyed
by over 20,500 customers, 3,900 individuals and businesses were
using Mobile Deposit Capture, and over 9,700 deposit customers were
enrolled for eStatements.
147 YEARS IN BUSINESS, WITH
25 COMMUNITY OFFICES AND
OVER 200 EMPLOYEES.
WWW.WAYNE BANK.CO M
2018 | ANN UAL REP ORT
COMING SOON IN 2019 — HANOVER TOWNSHIP, PA
WAYNEBANK.COM
Shohola, PA
Milford, PA
PIKE COUNTY
Tannersville, PA
Stroud Mall (Stroudsburg), PA
Marshalls Creek, PA
Effort, PA
MONROE COUNTY
Clarks Summit, PA
Central Scranton, PA
LACKAWANNA COUNTY
Wurtsboro, NY
Roscoe, NY
Narrowsburg, NY
Monticello, NY
Liberty, NY
Callicoon, NY
SULLIVAN COUNTY
Walton, NY
Roxbury, NY
Hamden, NY
Franklin, NY
Andes, NY
DELAWARE COUNTY
Stamford, NY
Willow Avenue (Honesdale), PA
Waymart, PA
Lakewood, PA
Honesdale, PA
Hawley, PA
WAYNE COUNTY
SUPPORTING OUR LOCAL COMMUNITIES HAS BEEN A
HALLMARK OF WAYNE BANK SINCE OUR FOUNDING.
On the deposit side, we continued the momentum we had gained with our newly
enhanced Rewards Checking account by offering special quarterly promotions
to Rewards Checking members. Promotions included an account credit with
e-statement registration, a reduction to a personal loan annual percentage rate, a
cash reserve line of credit annual fee waiver, and a special interest rate on a holiday
savings club. The promotions added significant value to the Rewards Checking
product and were well received by customers.
Supporting our local communities has been a hallmark of Wayne Bank since our
founding. In 2018, we contributed to hundreds of local organizations throughout
Pennsylvania and New York. Our community-minded employees participated in
a record number of events throughout the Bank’s six counties including Wayne
County’s Wildflower Music Festival, Hawley Winterfest, Pleasant Mount Tractor
Parade, Waymart Pride & Patriotism Parade, and Steampunk Honesdale. In
Sullivan County, we took part in the Liberty Fourth of July Parade, the Wurtsboro
Board of Trade Street Fair, the Monticello Bagel Festival, the Callicoon County Fair,
and the Narrowsburg Honey Bee Festival. Monroe County saw us at the Pocono
Home Show, Middle Smithfield Township Community Day, and the 1000 Pink
Lights Walk. The Scranton Half Marathon, Lackawanna Arts Festival, Scranton
First Friday, and Komen NEPA Race For The Cure kept us involved in Lackawanna
County. We enjoyed our time at Delaware County’s Stamford Flag Day Parade, New-
Old Franklin Day, Delaware County Fair, Celebrate Roxbury Summer Festival, Andes
Community Days, and Hamden Bass-Ball Game. We participated in Pike County at
the Milford Reader’s and Writers Festival, Hemlock Farms National Night Out, and
the St. Baldrick’s Foundation event.
Wayne Bank employees also devoted time to helping their local schools throughout
the year. In Sullivan County, students from the Roscoe Central School District
visited the Bank’s newly relocated Roscoe Community Office for a tour and
presentation on financial skills geared towards helping the students prepare for
college. Members of the Bank’s Lackawanna County Community Office team
participated in the American Bankers Association Foundation’s Teach Children to
Save program. In Delaware County, Wayne Bank’s Walton Community Office held a
school supply drive for the Walton Central School District.
The success and growth of our organization is the direct result of our exceptional
employees and we are so proud to honor the continued dedication and commitment
of those who celebrated milestone years of service with Wayne Bank in 2018.
Congratulations to Kelly Teeple, Executive Administrative Assistant Specialist, and
Jodi Wood, Loan Operations Specialist, for their thirty years of service. Adding
employee who celebrated twenty-five, twenty, fifteen, ten, and five year anniversaries,
the group represents 250 years of Community Banking experience.
SMART BANKING SOLUTION CENTER
To increase awareness about the advantages of
electronic banking, we created and launched
our brand new Smart Banking Solution Center
in the Central Scranton Community Office in
December. The Smart Banking Solution Center
showcases Online Banking, Mobile Banking,
Mobile Deposit Capture, BillPay, Direct Deposit,
Instant Balance, Touch ID®, and CardValet®. The
centerpiece is an interactive, state-of-the-art,
floor standing touchscreen that customers can
use to access detailed information and video
tutorials. The Smart Banking Solution Center
is part of Wayne Bank’s ongoing initiative to
not only provide our customers with the most
advanced and secure bank technology, but
to demonstrate how easy and accessible this
technology is for everyone to use.
SENIOR MANAGEMENT TEAM
Wayne Bank Senior Management Team (left to right): William S. Lance, Executive Vice President; Diane Wylam, Esq., Senior Vice President; Robert J. Mancuso,
Executive Vice President; Lewis J. Critelli, President and Chief Executive Officer; John F. Carmody, Executive Vice President; John H. Sanders, Senior Vice President;
James F. Burke, Executive Vice President; Ryan J. French, Senior Vice President
The year’s progress provided many opportunities for employee growth and positive
Loan Officer for Sullivan County. Using their experience, expertise, and
recognition. Eli Tomlinson was promoted to Senior Vice President and Information
local knowledge, these lenders will serve the needs of local businesses
Security Officer, Frank Sislo to Vice President, Gerald Arnese to Assistant Vice
throughout their respective counties. Wayne Bank also brought Robert
President, Teresa Hynes to Assistant Vice President, Christine Routledge to
Sebastianelli on board as an Assistant Vice President and Security/
Assistant Vice President, John Baker to Network Manager, Ronald DePasquale
Fraud Officer. Rob has an extensive law enforcement and investigative
to Facilities Officer, Timothy Gutliph to Community Office Manager in Walton,
background and will work to further strengthen the Bank’s fraud
Tanyia Vannatta to Community Office Manager in Callicoon, Kim Crellin to
prevention security program.
Assistant Manager in Honesdale, Cheryl Wilkerson to Community Office Manager
in Tannersville, Joelyn Lee to Assistant Manager in Waymart, and Wendy Olsen to
Assistant Manager in Milford. Executive Vice President and Chief Operating Officer,
Robert J. Mancuso, was honored by the Pennsylvania Bankers Association for his
40 years of service to the banking industry. Wealth Management Administrative
Assistant, Lianne Waller, and Electronic Banking Representative, Brandi Rollison,
were both recognized with Wayne Bank’s Presidential Award for Excellence.
The Bank’s commercial lending team also grew in 2018. John P. Ford joined the
Bank as a Senior Vice President and Commercial Loan Officer for Lackawanna
County, Jeffrey Reimer as a Senior Vice President and Commercial Loan Officer
for Monroe County, and Colleen A. Osterhout as a Vice President and Commercial
Lewis J. Critelli
President and CEO
We truly appreciate the support and confidence of our stockholders. We
thank you for your ownership interest in Norwood as we continue to work
to enhance shareholder value. Please keep us in mind for all of your
financial needs.
CLARKS SUMMIT, PA
Our recently relocated Clarks Summit
Office offers customers the latest
in banking technology and
modern conveniences.
2018 NORWOOD FINANCIAL CORP BOARD OF DIRECTORS
NEW CORPORATE SIGNAGE
Signage was updated throughout all
offices with the new blue logo.The
Wayne Bank home office in Honesdale
set itself apart with a backlit sign of
bronze and brushed metal, to reflect
a corporate look.
ROSCOE
SULLIVAN
COUNTY
CALLICOON
LIBERTY
ROSCOE, NY
The relocated Roscoe Office features
newly renovated space, improved
parking, and other upgrades to better
serve the community.
STAMFORD
ROXBURY
FRANKLIN
DELAWARE
COUNTY
HAMDEN
ANDES
WALTON
WAYMART
NARROWSBURG
MONTICELLO
WURTSBORO
LAKEWOOD
WAYNE
COUNTY
HONESDALE
WILLOW
AVE
HAWLEY
LACKAWANNA
COUNTY
CLARKS
SUMMIT
CENTRAL
SCRANTON
SHOHOLA
MILFORD
PIKE
COUNTY
MONROE
COUNTY
TANNSERSVILLE
MARSHALLS
CREEK
EFFORT
STROUD MALL
PROUDLY SERVING
25 COMMUNITY
OFFICES IN
6 COUNTIES
LACKAWANNA COUNTY
Central Scranton, PA
Clarks Summit, PA
MONROE COUNTY
Effort, PA
Marshalls Creek, PA
Stroud Mall (Stroudsburg), PA
Tannersville, PA
PIKE COUNTY
Milford, PA
Shohola, PA
WAYNE COUNTY
Hawley, PA
Honesdale, PA
Lakewood, PA
Waymart, PA
Willow Avenue (Honesdale), PA
Stamford, NY
DELAWARE COUNTY
Andes, NY
Franklin, NY
Hamden, NY
Roxbury, NY
Walton, NY
SULLIVAN COUNTY
Callicoon, NY
Liberty, NY
Monticello, NY
Narrowsburg, NY
Roscoe, NY
Wurtsboro, NY
WILLIAM W. DAVIS, JR.
Chairman of the Board
SUSAN CAMPFIELD
Director
RALPH A. MATERGIA, ESQ.
Director
JOSEPH W. ADAMS
Director
LEWIS J. CRITELLI
President and CEO
KEVIN M. LAMONT
DR. KENNETH A. PHILLIPS
MEG L. HUNGERFORD
DR. ANDREW A. FORTE
Director
Director
Director
Director
WAYNE BA NK .CO M
COMING SOON IN 2019 — HANOVER TOWNSHIP, PA
SUPPORTING OUR LOCAL COMMUNITIES HAS BEEN A
HALLMARK OF WAYNE BANK SINCE OUR FOUNDING.
On the deposit side, we continued the momentum we had gained with our newly
enhanced Rewards Checking account by offering special quarterly promotions
to Rewards Checking members. Promotions included an account credit with
e-statement registration, a reduction to a personal loan annual percentage rate, a
cash reserve line of credit annual fee waiver, and a special interest rate on a holiday
savings club. The promotions added significant value to the Rewards Checking
product and were well received by customers.
Supporting our local communities has been a hallmark of Wayne Bank since our
founding. In 2018, we contributed to hundreds of local organizations throughout
Pennsylvania and New York. Our community-minded employees participated in
a record number of events throughout the Bank’s six counties including Wayne
County’s Wildflower Music Festival, Hawley Winterfest, Pleasant Mount Tractor
Parade, Waymart Pride & Patriotism Parade, and Steampunk Honesdale. In
Sullivan County, we took part in the Liberty Fourth of July Parade, the Wurtsboro
Board of Trade Street Fair, the Monticello Bagel Festival, the Callicoon County Fair,
and the Narrowsburg Honey Bee Festival. Monroe County saw us at the Pocono
Home Show, Middle Smithfield Township Community Day, and the 1000 Pink
Lights Walk. The Scranton Half Marathon, Lackawanna Arts Festival, Scranton
First Friday, and Komen NEPA Race For The Cure kept us involved in Lackawanna
County. We enjoyed our time at Delaware County’s Stamford Flag Day Parade, New-
Old Franklin Day, Delaware County Fair, Celebrate Roxbury Summer Festival, Andes
Community Days, and Hamden Bass-Ball Game. We participated in Pike County at
the Milford Reader’s and Writers Festival, Hemlock Farms National Night Out, and
the St. Baldrick’s Foundation event.
Wayne Bank employees also devoted time to helping their local schools throughout
the year. In Sullivan County, students from the Roscoe Central School District
visited the Bank’s newly relocated Roscoe Community Office for a tour and
presentation on financial skills geared towards helping the students prepare for
college. Members of the Bank’s Lackawanna County Community Office team
participated in the American Bankers Association Foundation’s Teach Children to
Save program. In Delaware County, Wayne Bank’s Walton Community Office held a
school supply drive for the Walton Central School District.
The success and growth of our organization is the direct result of our exceptional
employees and we are so proud to honor the continued dedication and commitment
of those who celebrated milestone years of service with Wayne Bank in 2018.
Congratulations to Kelly Teeple, Executive Administrative Assistant Specialist, and
Jodi Wood, Loan Operations Specialist, for their thirty years of service. Adding
employee who celebrated twenty-five, twenty, fifteen, ten, and five year anniversaries,
the group represents 250 years of Community Banking experience.
SMART BANKING SOLUTION CENTER
To increase awareness about the advantages of
electronic banking, we created and launched
our brand new Smart Banking Solution Center
in the Central Scranton Community Office in
December. The Smart Banking Solution Center
showcases Online Banking, Mobile Banking,
Mobile Deposit Capture, BillPay, Direct Deposit,
Instant Balance, Touch ID®, and CardValet®. The
centerpiece is an interactive, state-of-the-art,
floor standing touchscreen that customers can
use to access detailed information and video
tutorials. The Smart Banking Solution Center
is part of Wayne Bank’s ongoing initiative to
not only provide our customers with the most
advanced and secure bank technology, but
to demonstrate how easy and accessible this
technology is for everyone to use.
SENIOR MANAGEMENT TEAM
Wayne Bank Senior Management Team (left to right): William S. Lance, Executive Vice President; Diane Wylam, Esq., Senior Vice President; Robert J. Mancuso,
Executive Vice President; Lewis J. Critelli, President and Chief Executive Officer; John F. Carmody, Executive Vice President; John H. Sanders, Senior Vice President;
James F. Burke, Executive Vice President; Ryan J. French, Senior Vice President
The year’s progress provided many opportunities for employee growth and positive
recognition. Eli Tomlinson was promoted to Senior Vice President and Information
Security Officer, Frank Sislo to Vice President, Gerald Arnese to Assistant Vice
President, Teresa Hynes to Assistant Vice President, Christine Routledge to
Assistant Vice President, John Baker to Network Manager, Ronald DePasquale
to Facilities Officer, Timothy Gutliph to Community Office Manager in Walton,
Tanyia Vannatta to Community Office Manager in Callicoon, Kim Crellin to
Assistant Manager in Honesdale, Cheryl Wilkerson to Community Office Manager
in Tannersville, Joelyn Lee to Assistant Manager in Waymart, and Wendy Olsen to
Assistant Manager in Milford. Executive Vice President and Chief Operating Officer,
Robert J. Mancuso, was honored by the Pennsylvania Bankers Association for his
40 years of service to the banking industry. Wealth Management Administrative
Assistant, Lianne Waller, and Electronic Banking Representative, Brandi Rollison,
were both recognized with Wayne Bank’s Presidential Award for Excellence.
The Bank’s commercial lending team also grew in 2018. John P. Ford joined the
Bank as a Senior Vice President and Commercial Loan Officer for Lackawanna
County, Jeffrey Reimer as a Senior Vice President and Commercial Loan Officer
for Monroe County, and Colleen A. Osterhout as a Vice President and Commercial
Loan Officer for Sullivan County. Using their experience, expertise, and
local knowledge, these lenders will serve the needs of local businesses
throughout their respective counties. Wayne Bank also brought Robert
Sebastianelli on board as an Assistant Vice President and Security/
Fraud Officer. Rob has an extensive law enforcement and investigative
background and will work to further strengthen the Bank’s fraud
prevention security program.
We truly appreciate the support and confidence of our stockholders. We
thank you for your ownership interest in Norwood as we continue to work
to enhance shareholder value. Please keep us in mind for all of your
financial needs.
Lewis J. Critelli
President and CEO
2018 NORWOOD FINANCIAL CORP BOARD OF DIRECTORS
Willow Avenue (Honesdale), PA
Stamford, NY
WILLIAM W. DAVIS, JR.
Chairman of the Board
SUSAN CAMPFIELD
RALPH A. MATERGIA, ESQ.
JOSEPH W. ADAMS
Director
Director
Director
LEWIS J. CRITELLI
President and CEO
KEVIN M. LAMONT
Director
DR. KENNETH A. PHILLIPS
Director
MEG L. HUNGERFORD
Director
DR. ANDREW A. FORTE
Director
WAYNEBANK.COM
COMING SOON IN 2019 — HANOVER TOWNSHIP, PA
NEW CORPORATE SIGNAGE
Signage was updated throughout all
offices with the new blue logo.The
Wayne Bank home office in Honesdale
set itself apart with a backlit sign of
bronze and brushed metal, to reflect
a corporate look.
CLARKS SUMMIT, PA
Our recently relocated Clarks Summit
Office offers customers the latest
in banking technology and
modern conveniences.
WAYNE COUNTY
Hawley, PA
Honesdale, PA
Lakewood, PA
Waymart, PA
ROSCOE
SULLIVAN
COUNTY
CALLICOON
LIBERTY
ROSCOE, NY
The relocated Roscoe Office features
newly renovated space, improved
parking, and other upgrades to better
serve the community.
STAMFORD
ROXBURY
FRANKLIN
DELAWARE
COUNTY
HAMDEN
ANDES
WALTON
WAYMART
NARROWSBURG
MONTICELLO
WURTSBORO
LAKEWOOD
WAYNE
COUNTY
HONESDALE
WILLOW
AVE
HAWLEY
LACKAWANNA
COUNTY
CLARKS
SUMMIT
CENTRAL
SCRANTON
SHOHOLA
MILFORD
PIKE
COUNTY
MONROE
COUNTY
TANNSERSVILLE
MARSHALLS
CREEK
EFFORT
STROUD MALL
PROUDLY SERVING
25 COMMUNITY
OFFICES IN
6 COUNTIES
LACKAWANNA COUNTY
Central Scranton, PA
Clarks Summit, PA
MONROE COUNTY
Effort, PA
Marshalls Creek, PA
Stroud Mall (Stroudsburg), PA
Tannersville, PA
PIKE COUNTY
Milford, PA
Shohola, PA
DELAWARE COUNTY
Andes, NY
Franklin, NY
Hamden, NY
Roxbury, NY
Walton, NY
SULLIVAN COUNTY
Callicoon, NY
Liberty, NY
Monticello, NY
Narrowsburg, NY
Roscoe, NY
Wurtsboro, NY
SUPPORTING OUR LOCAL COMMUNITIES HAS BEEN A
HALLMARK OF WAYNE BANK SINCE OUR FOUNDING.
On the deposit side, we continued the momentum we had gained with our newly
enhanced Rewards Checking account by offering special quarterly promotions
to Rewards Checking members. Promotions included an account credit with
e-statement registration, a reduction to a personal loan annual percentage rate, a
cash reserve line of credit annual fee waiver, and a special interest rate on a holiday
savings club. The promotions added significant value to the Rewards Checking
product and were well received by customers.
Supporting our local communities has been a hallmark of Wayne Bank since our
founding. In 2018, we contributed to hundreds of local organizations throughout
Pennsylvania and New York. Our community-minded employees participated in
a record number of events throughout the Bank’s six counties including Wayne
County’s Wildflower Music Festival, Hawley Winterfest, Pleasant Mount Tractor
Parade, Waymart Pride & Patriotism Parade, and Steampunk Honesdale. In
Sullivan County, we took part in the Liberty Fourth of July Parade, the Wurtsboro
Board of Trade Street Fair, the Monticello Bagel Festival, the Callicoon County Fair,
and the Narrowsburg Honey Bee Festival. Monroe County saw us at the Pocono
Home Show, Middle Smithfield Township Community Day, and the 1000 Pink
Lights Walk. The Scranton Half Marathon, Lackawanna Arts Festival, Scranton
First Friday, and Komen NEPA Race For The Cure kept us involved in Lackawanna
County. We enjoyed our time at Delaware County’s Stamford Flag Day Parade, New-
Old Franklin Day, Delaware County Fair, Celebrate Roxbury Summer Festival, Andes
Community Days, and Hamden Bass-Ball Game. We participated in Pike County at
the Milford Reader’s and Writers Festival, Hemlock Farms National Night Out, and
the St. Baldrick’s Foundation event.
the year. In Sullivan County, students from the Roscoe Central School District
visited the Bank’s newly relocated Roscoe Community Office for a tour and
presentation on financial skills geared towards helping the students prepare for
college. Members of the Bank’s Lackawanna County Community Office team
participated in the American Bankers Association Foundation’s Teach Children to
school supply drive for the Walton Central School District.
The success and growth of our organization is the direct result of our exceptional
employees and we are so proud to honor the continued dedication and commitment
of those who celebrated milestone years of service with Wayne Bank in 2018.
Congratulations to Kelly Teeple, Executive Administrative Assistant Specialist, and
Jodi Wood, Loan Operations Specialist, for their thirty years of service. Adding
SMART BANKING SOLUTION CENTER
To increase awareness about the advantages of
electronic banking, we created and launched
our brand new Smart Banking Solution Center
in the Central Scranton Community Office in
December. The Smart Banking Solution Center
showcases Online Banking, Mobile Banking,
Mobile Deposit Capture, BillPay, Direct Deposit,
Instant Balance, Touch ID®, and CardValet®. The
centerpiece is an interactive, state-of-the-art,
floor standing touchscreen that customers can
use to access detailed information and video
tutorials. The Smart Banking Solution Center
is part of Wayne Bank’s ongoing initiative to
not only provide our customers with the most
advanced and secure bank technology, but
to demonstrate how easy and accessible this
technology is for everyone to use.
NEW CORPORATE SIGNAGE
Signage was updated throughout all
offices with the new blue logo.The
Wayne Bank home office in Honesdale
set itself apart with a backlit sign of
bronze and brushed metal, to reflect
a corporate look.
SENIOR MANAGEMENT TEAM
Wayne Bank Senior Management Team (left to right): William S. Lance, Executive Vice President; Diane Wylam, Esq., Senior Vice President; Robert J. Mancuso,
Executive Vice President; Lewis J. Critelli, President and Chief Executive Officer; John F. Carmody, Executive Vice President; John H. Sanders, Senior Vice President;
James F. Burke, Executive Vice President; Ryan J. French, Senior Vice President
Wayne Bank employees also devoted time to helping their local schools throughout
President, Teresa Hynes to Assistant Vice President, Christine Routledge to
Sebastianelli on board as an Assistant Vice President and Security/
The year’s progress provided many opportunities for employee growth and positive
Loan Officer for Sullivan County. Using their experience, expertise, and
recognition. Eli Tomlinson was promoted to Senior Vice President and Information
local knowledge, these lenders will serve the needs of local businesses
Security Officer, Frank Sislo to Vice President, Gerald Arnese to Assistant Vice
throughout their respective counties. Wayne Bank also brought Robert
Assistant Vice President, John Baker to Network Manager, Ronald DePasquale
Fraud Officer. Rob has an extensive law enforcement and investigative
to Facilities Officer, Timothy Gutliph to Community Office Manager in Walton,
background and will work to further strengthen the Bank’s fraud
Tanyia Vannatta to Community Office Manager in Callicoon, Kim Crellin to
prevention security program.
Save program. In Delaware County, Wayne Bank’s Walton Community Office held a
Assistant Manager in Milford. Executive Vice President and Chief Operating Officer,
We truly appreciate the support and confidence of our stockholders. We
thank you for your ownership interest in Norwood as we continue to work
to enhance shareholder value. Please keep us in mind for all of your
financial needs.
CLARKS SUMMIT, PA
Our recently relocated Clarks Summit
Office offers customers the latest
in banking technology and
modern conveniences.
Assistant Manager in Honesdale, Cheryl Wilkerson to Community Office Manager
in Tannersville, Joelyn Lee to Assistant Manager in Waymart, and Wendy Olsen to
Robert J. Mancuso, was honored by the Pennsylvania Bankers Association for his
40 years of service to the banking industry. Wealth Management Administrative
Assistant, Lianne Waller, and Electronic Banking Representative, Brandi Rollison,
were both recognized with Wayne Bank’s Presidential Award for Excellence.
The Bank’s commercial lending team also grew in 2018. John P. Ford joined the
Bank as a Senior Vice President and Commercial Loan Officer for Lackawanna
FRANKLIN
STAMFORD
ROXBURY
HAMDEN
ANDES
WALTON
DELAWARE
COUNTY
ROSCOE
SULLIVAN
COUNTY
CALLICOON
LIBERTY
LAKEWOOD
WAYNE
COUNTY
WAYMART
NARROWSBURG
HONESDALE
WILLOW
AVE
HAWLEY
MONTICELLO
WURTSBORO
SHOHOLA
MILFORD
PIKE
COUNTY
MONROE
COUNTY
TANNSERSVILLE
MARSHALLS
CREEK
EFFORT
STROUD MALL
LACKAWANNA
COUNTY
CLARKS
SUMMIT
CENTRAL
SCRANTON
ROSCOE, NY
The relocated Roscoe Office features
newly renovated space, improved
parking, and other upgrades to better
serve the community.
PROUDLY SERVING
25 COMMUNITY
OFFICES IN
6 COUNTIES
WAYNE COUNTY
Hawley, PA
Honesdale, PA
Lakewood, PA
Waymart, PA
Willow Avenue (Honesdale), PA
DELAWARE COUNTY
Andes, NY
Franklin, NY
Hamden, NY
Roxbury, NY
Stamford, NY
Walton, NY
SULLIVAN COUNTY
Callicoon, NY
Liberty, NY
Monticello, NY
Narrowsburg, NY
Roscoe, NY
Wurtsboro, NY
LACKAWANNA COUNTY
Central Scranton, PA
Clarks Summit, PA
MONROE COUNTY
Effort, PA
Marshalls Creek, PA
Stroud Mall (Stroudsburg), PA
Tannersville, PA
PIKE COUNTY
Milford, PA
Shohola, PA
employee who celebrated twenty-five, twenty, fifteen, ten, and five year anniversaries,
County, Jeffrey Reimer as a Senior Vice President and Commercial Loan Officer
the group represents 250 years of Community Banking experience.
for Monroe County, and Colleen A. Osterhout as a Vice President and Commercial
Lewis J. Critelli
President and CEO
2018 NORWOOD FINANCIAL CORP BOARD OF DIRECTORS
WILLIAM W. DAVIS, JR.
Chairman of the Board
SUSAN CAMPFIELD
RALPH A. MATERGIA, ESQ.
JOSEPH W. ADAMS
Director
Director
Director
LEWIS J. CRITELLI
President and CEO
KEVIN M. LAMONT
DR. KENNETH A. PHILLIPS
MEG L. HUNGERFORD
DR. ANDREW A. FORTE
Director
Director
Director
Director
WAYN EBAN K. CO M
COMING SOON IN 2019 — HANOVER TOWNSHIP, PA
NORWOOD FINANCIAL CORP
WWW.WAYNEBANK.COM
2018 | CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP
NORWOOD FINANCIAL CORP
SUMMARY OF SELE CTE D F IN ANCI AL DATA
DIRECTORY OF OF FICERS
(dollars in thousands except per share data)
FOR THE YEARS ENDED DECEMBER 31,
2018
2017
2016
2015
2014
Net interest income
Provision for loan losses
Other income
Net realized gains on sales of loans and securities
$36,839
$34,908
$28,590
$24,521
$24,560
1,725
2,200
2,050
4,580
1,680
6,837
228
6,496
415
4,841
3,969
338
730
3,940
1,170
Other expenses
25,975
24,870
23,124
17,100
17,727
Income before income taxes
16,204
14,749
Income tax expense
2,553
6,551
8,595
1,884
7,540
1,632
10,263
2,606
NET INCOME
Net income per share -Basic*
-Diluted*
Cash dividends declared*
Dividend pay-out ratio
Return on average assets
Return on average equity
BALANCES AT YEAR-END
Total assets
Loans receivable
$13,651
$8,198
$6,711
$5,908
$7,657
$2.19
$2.17
$0.90
$1.32
$1.31
$0.87
$1.16
$1.15
$0.83
$1.07
$1.07
$0.83
$1.40
$1.40
$0.80
41.10%
65.91%
71.84%
77.50%
57.14%
1.19%
11.71%
0.73%
7.04%
0.74%
6.17%
0.80%
5.83%
1.08%
7.92%
$1,184,559
$1,132,916
$1,111,183
$750,505
$711,635
850,182
764,092
713,889
559,925
501,135
Allowance for loan losses
8,452
7,634
6,463
7,298
5,875
Total deposits
Stockholders’ equity
946,780
929,384
925,385
550,909
559,944
122,285
115,739
111,079
100,998
99,041
Trust assets under management
151,224
157,838
138,167
131,690
134,888
Book value per share*
$19.43
$18.61
$17.43
$18.26
$17.53
Tier 1 Capital to risk-adjusted assets
13.04%
13.16%
13.27%
15.86%
17.33%
Total Capital to risk-adjusted assets
14.00%
14.11%
14.12%
17.09%
18.49%
Allowance for loan losses to total loans
Non-performing assets to total assets
0.99%
0.19%
1.00%
0.37%
0.91%
0.64%
1.30%
1.33%
1.17%
1.31%
*Per share information has been restated to reflect the 50% stock dividend declared in 2017.
NORWOOD FINANCIAL CORP
William W. Davis, Jr. ............................. Chairman of the Board
Dr. Andrew A. Forte ........................ Vice Chairman of the Board
Lewis J. Critelli ................... President & Chief Executive Officer
William S. Lance ...............................Executive Vice President,
Chief Financial Officer & Secretary
James F. Burke ...................................Executive Vice President
John F. Carmody .................................Executive Vice President
Robert J. Mancuso ..............................Executive Vice President
John H. Sanders ..................................... Senior Vice President
WAYNE BANK
William W. Davis, Jr. ............................. Chairman of the Board
Dr. Andrew A. Forte ........................ Vice Chairman of the Board
Lewis J. Critelli ................... President & Chief Executive Officer
William S. Lance ...............................Executive Vice President,
Chief Financial Officer & Secretary
James F. Burke ..................................Executive Vice President,
Chief Lending Officer
John F. Carmody ................................Executive Vice President,
Chief Credit Officer
Robert J. Mancuso .............................Executive Vice President,
Chief Operating Officer
Ryan J. French ..................................... Senior Vice President,
Director of Human Resources
John H. Sanders .................................... Senior Vice President,
Retail Lending Manager
Diane M. Wylam ........Senior Vice President, Senior Trust Officer
Thomas A. Byrne .................................... Senior Vice President
Joseph A. Castrogiovanni ........................ Senior Vice President
Kenneth C. Doolittle ............................... Senior Vice President
John Ford .............................................. Senior Vice President
Nancy A. Hart ........................ Senior Vice President, Controller
& Assistant Secretary
Dawnette Hotaling .................................. Senior Vice President
Linda D. Mader ...................................... Senior Vice President
Vincent O’Bell ........................................ Senior Vice President
F. Jeffrey Reimer .................................... Senior Vice President
Eli T. Tomlinson ..................................... Senior Vice President
John Veleber .......................................... Senior Vice President
Barbara A. Ridd .................Vice President & Assistant Secretary
Robert J. Behrens, Jr. ........................................ Vice President
Pilar Cueva ...................................................... Vice President
Steven R. Daniels ............................................. Vice President
Karen R. Gasper ............................................... Vice President
Amanda Hall .................................................... Vice President
Jill A. Hessling ................................................. Vice President
John E. Koczwara ............................................. Vice President
Julie R. Kuen .................................................. Vice President
Colleen Osterhout ............................................. Vice President
Richard A. Siarniak ........................................... Vice President
Frank J. Sislo ................................................... Vice President
Kara R. Suchy .................................................. Vice President
Gerald J. Arnese ................................. Assistant Vice President
Douglas W. Atherton ............................ Assistant Vice President
Derek Bellinger ................................... Assistant Vice President
Teresa Hynes ...................................... Assistant Vice President
Vonnie Lewis ...................................... Assistant Vice President
Bonnie Lockett ................................... Assistant Vice President
Kristine Malti ..................................... Assistant Vice President
Eileen Mershon .................................. Assistant Vice President
Gerry Moore ....................................... Assistant Vice President
Christine Routledge ............................ Assistant Vice President
Robert Sebastianelli ............................ Assistant Vice President
Michele Bailey................................ Community Office Manager
Karen Beissel ................................. Community Office Manager
Nicole Folina .................................. Community Office Manager
Craig D. Grimm .............................. Community Office Manager
Timothy Gutliph .............................. Community Office Manager
Sandra C. Mruczkewycz ................... Community Office Manager
Madeline Portugal ........................... Community Office Manager
AnnaMae Rechtorovic ..................... Community Office Manager
Debra Renwick ............................... Community Office Manager
Elaine Reuthe ................................ Community Office Manager
Jessica Santiago ............................. Community Office Manager
Denise Seman ................................ Community Office Manager
Julie Shenyo .................................. Community Office Manager
Tanyia Vannatta .............................. Community Office Manager
Cheryl Wilkerson ............................. Community Office Manager
Krystin Woodcock ........................... Community Office Manager
Laurie J. Bishop ............... Assistant Community Office Manager
Kimberly Crellin .............. Assistant Community Office Manager
Denise R. Kern ................. Assistant Community Office Manager
Joelyn Lee........................ Assistant Community Office Manager
Barbara Medwynter ........... Assistant Community Office Manager
Wendy Olsen .................... Assistant Community Office Manager
Diane L. Richter ............... Assistant Community Office Manager
Stacey Stephenson ........... Assistant Community Office Manager
John Baker .................................................. Network Manager
Ronald DePasquale ........................................ Facilities Officer
Tracy Goodrich ................................................ Training Officer
Annette Jurkowski ................. Assistant BSA/Compliance Officer
Marianne McConeghy ........................... Trust Operations Officer
Linda A. Meskey ................................................Credit Analyst
Amanda R. Miller .......Commercial Loan Documentation Officer
Jamie Padula ..............Human Resources Administrative Officer
Kathryn A. Serniak ................................. Mortgage Loan Officer
Briana Scholl ......................................Credit Analyst Manager
Gary Steich ..................................... Resource Recovery Officer
Bonnie Rutledge .................................... Assistant Trust Officer
NORWOOD INVESTMENT CORP
Lewis J. Critelli ................... President & Chief Executive Officer
William S. Lance .....................................................Treasurer
Scott C. Rickard .............. Investment Executive, LPL Financial
MONROE COUNTY ASSOCIATE BOARD
Michael J. Baxter
Sara Cramer
Dr. Andrew A. Forte
Ralph A. Matergia, Esq.
James H. Ott
Marvin Papillon
Ray Price
Ron Sarajian
2018 CONSOLIDATED FINANCIAL REPORT
Management’s Discussion & Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Management’s Report On Internal Control Over Financial Reporting . . . . 21
Reports Of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . 22
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Consolidated Statements Of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Consolidated Statements Of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . 26
Consolidated Statements Of Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . 27
Consolidated Statements Of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Notes To Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Investor Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
MANAGEMENT’S DISCUSSION AND ANALYSIS
INTRODUCTION
This Management’s Discussion and Analysis and related financial data are presented to assist in the
understanding and evaluation of the financial condition and results of operations for Norwood Financial Corp
(the Company), and its subsidiary Wayne Bank (the Bank), as of December 31, 2018 and 2017, and for the
years ended December 31, 2018 and 2017. This section should be read in conjunction with the consolidated
financial statements and related footnotes.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 contains safe harbor provisions regarding forward-
looking statements. When used in this discussion, the words “believes”, “anticipates”, “contemplates”, “expects”,
and similar expressions are intended to identify forward-looking statements. Such statements are subject to
certain risks and uncertainties, which could cause actual results to differ materially from those projected.
Those risks and uncertainties include changes in Federal and State laws, changes in interest rates, the ability
to control costs and expenses, demand for real estate, government fiscal and trade policies, cybersecurity and
general economic conditions. The Company undertakes no obligation to publicly release the results of any
revisions to those forward-looking statements which may be made to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
CRITICAL ACCOUNTING POLICIES
Note 2 to the Company’s consolidated financial statements (incorporated by reference in Item 8 of the Form
10-K) lists significant accounting policies used in the development and presentation of its financial statements.
This discussion and analysis, the significant accounting policies, and other financial statement disclosures
identify and address key variables and other qualitative and quantitative factors that are necessary for an
understanding and evaluation of the Company and its results of operations.
Material estimates that are particularly susceptible to significant change in the near term relate to the
determination of the allowance for loan losses, the valuation of deferred tax assets, the determination of other-
than-temporary impairment on securities, the determination of goodwill impairment and the fair value of
financial instruments. Please refer to the discussion of the allowance for loan losses calculation under
“Allowance for Loan Losses and Non-performing Assets” in the “Financial Condition” section.
The deferred income taxes reflect temporary differences in the recognition of the revenue and expenses for
tax reporting and financial statement purposes, principally because certain items are recognized in different
periods for financial reporting and tax return purposes. Although realization is not assured, the Company
believes it is more likely than not that all deferred tax assets will be realized. Prior to the enactment of the Tax
Cuts and Jobs Act (the “Act”) on December 22, 2017, the Company had a net deferred tax asset totaling $7.6
million, based on the pre-Act federal tax rate of 35%. As a result of the Act’s reduction in the corporate income
tax rate to 21%, the Company revalued its net deferred tax asset as of December 31, 2017, which resulted in a
$3,060,000 reduction in its value. The reduction in the value of the net deferred tax asset was recorded as
additional income tax expense in 2017.
2
3
NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT In estimating other-than-temporary impairment losses on securities, the Company considers 1) the length
of time and extent to which the fair value has been less than cost and 2) the financial condition of the issuer.
The Company does not have the intent to sell these securities and it is more likely than not that it will not sell
the securities before recovery of their cost basis. The Company believes that any unrealized losses at
December 31, 2018 and 2017 represent temporary impairment of the securities.
The fair value of financial instruments is based upon quoted market prices, when available. For those
instances where a quoted price is not available, fair values are based upon observable market based
parameters as well as unobservable parameters. Any such valuation is applied consistently over time.
In connection with the acquisition of North Penn Bancorp, Inc. in 2011, we recorded goodwill in the amount
of $9.7 million, representing the excess of amounts paid over the fair value of the net assets of the institution
acquired at the date of acquisition. In connection with the acquisition of Delaware Bancshares, Inc. in 2016,
we recorded goodwill in the amount of $1.6 million, representing the excess of amounts paid over the fair
value of the net assets of the institution acquired at the date of acquisition. Goodwill is tested annually and
deemed impaired when the carrying value of goodwill exceeds its implied fair value.
RESULTS OF OPERATIONS – SUMMARY
Net income for the Company for the year ended December 31, 2018 was $13,651,000, which was $5,453,000
higher than the $8,198,000 earned in 2017. Earnings per share on a fully diluted basis were $2.17 for 2018
compared to $1.31 in 2017, after adjusting for the 50% stock dividend declared in 2017. The return on
average assets for the year was 1.19% with a return on average equity of 11.71% compared to 0.73% and
7.04%, respectively, in 2017. Core operating results reflected a return on average assets of 1.02% for 2017
and a return on average equity of 10.39%. Net interest income increased $1,931,000 and other income
improved $154,000 to offset the $1,105,000 increase in other expenses. Income tax expense was reduced
$3,998,000 due to the non-recurring expense recognized in 2017 resulting from the enactment of the Tax Cuts
and Jobs Act (the “Act”), combined with the impact of the reduction in the marginal tax rate from 35% in 2017
to 21% in 2018. In 2018, income before income tax improved $1,455,000, or 9.9%.
Net interest income (fully taxable equivalent, or fte) totaled $37,899,000 which was an increase of
$809,000 from the 2017 total, despite a lower tax-equivalent adjustment resulting from the Act.
Average loans outstanding increased $63.2 million in 2018, which resulted in an increase in fte interest
income of $3,585,000. Total average securities decreased $31.1 million in 2018 as proceeds were utilized
to fund loan growth, resulting in a $1,224,000 decrease in fte interest income on securities. Average interest-
bearing deposits with banks were $4.0 million in 2018 and interest income in this area increased $25,000.
Average interest-bearing deposits increased $6.0 million due primarily to growth in time deposits, and
resulted in a $1,267,000 increase in interest expense. The cost of borrowed funds increased $310,000
compared to the prior year due primarily to an $8.1 million increase in average borrowings and an increase
in the cost of borrowings. The resulting fte net interest spread decreased eight basis points to 3.36% in 2018
as an 11 basis point improvement in the yield earned was offset by a 19 basis point increase in the cost of
funds. The improvement in the yield earned was negatively impacted by the Act through a reduced tax-
equivalent adjustment.
2
3
NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
Loans receivable increased $86.1 million from the prior year-end. Loan growth included a $44.9 million
increase in commercial loans due primarily to a $31.9 million increase in commercial real estate loans.
Retail loans increased $41.0 million in 2018 due to a $40.5 million increase in indirect auto and marine
financing. Residential mortgage loans and construction loans decreased $19,000, net. Total non-performing
loans decreased from $2.5 million, and 0.32% of total loans at the end of 2017, to $1.1 million, or 0.13% of
total loans on December 31, 2018. Net charge-offs totaled $907,000 in 2018, which was a decrease from the
$1,029,000 recorded in 2017. Based on management’s analysis, the Company determined that it would be
appropriate to allocate $1,725,000 to the allowance for loan losses in 2018, which resulted in a decrease in the
ratio of the allowance for loan losses to total loans outstanding of 0.99% in 2018 compared to 1.00% on
December 31, 2017. The allowance for loan losses represented 741% of total non-performing loans on
December 31, 2018 compared to 308% as of December 31, 2017.
Other income for the year ended December 31, 2018 totaled $7,065,000 compared to $6,911,000 in the
prior year, an increase of $154,000. Gains on the sale of loans and investment securities decreased $187,000
in the aggregate, while all other items of other income increased $341,000, net. Service charges and fees
collected from the expanded customer base contributed to this increase.
Other expenses were $25,975,000 in 2018 compared to $24,870,000 for the similar period in 2017, an
increase of $1,105,000. Salaries and benefits costs increased $1,170,000 in 2018, while occupancy and
furniture and equipment costs increased $334,000. Foreclosed real estate expense decreased $992,000 in
2018, while all other operating expenses increased $593,000, net. Income tax expense for the year totaled
$2,553,000, which was a decrease of $3,998,000 from the prior year. The decrease reflects a non-recurring
charge of $3,060,000 recorded in 2017 related to the revaluation of deferred tax assets. The effective tax rate
in 2018 was 15.8% compared to 44.4% in 2017. Excluding the revaluation charge, the effective tax rate in
2017 would have been 23.7%.
The following table sets forth changes in net income (in thousands):
Net income 2017
Net interest income
Provision for loan losses
Net gains on sales of loans and securities
Other income
Salaries and employee benefits
Occupancy, furniture and equipment
Foreclosed real estate owned
Other expenses
Income tax expense - before prior year net deferred tax revaluation
Income tax expense - net deferred tax asset revaluation
Net income 2018
$ 8,198
1,931
475
(187)
341
(1,170)
(334)
992
(593)
938
3,060
$ 13,651
4
5
NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
FINANCIAL CONDITION
TOTAL ASSETS
Total assets as of December 31, 2018, were $1.185 billion compared to $1.133 billion as of year-end 2017,
an increase of $51.6 million. The increase in assets was primarily attributable to organic loan growth.
LOANS RECEIVABLE
As of December 31, 2018, loans receivable totaled $850.2 million compared to $764.1 million as of year-end
2017, an increase of $86.1 million. Commercial loans, including commercial real estate, grew $44.9 million,
while retail loans increased $41.0 million during the year. The remaining variance can be attributed to
deferred loan fees, net.
Residential real estate loans, which include home equity lending, totaled $235.5 million as of December 31,
2018, compared to $235.8 million as of year-end 2017, a decrease of $236,000. Home equity loans increased
$584,000 in 2018 to $52.4 million from $51.8 million at December 31, 2017. The Company does not originate
any non-traditional mortgage products such as interest-only loans or option adjustable rate mortgages and has
no sub-prime mortgage exposure. The Company evaluates sales of its long-term, fixed-rate residential loan
production for interest rate risk management. During 2018, the Company sold residential real estate loans
totaling $752,000. In the current interest rate environment, the Company expects to evaluate selling mortgage
loans in 2019.
Commercial loans consist principally of loans made to small businesses within the Company’s market and
are usually secured by real estate or other assets of the borrower. Commercial real estate loans totaled $374.8
million as of December 31, 2018, increasing from $342.9 million as of December 31, 2017. The terms for
commercial real estate loans are typically 15 to 20 years, with adjustable rates based on a spread to the prime
rate or fixed for the initial three to five year period then adjusting to a spread to the prime rate. The majority
of the Company’s commercial real estate portfolio is owner occupied and includes the personal guarantees of
the principals. Commercial loans consisting principally of lines of credit and term loans secured by equipment
or other assets and loans to municipalities increased $13.1 million to $110.5 million as of December 31, 2018.
The Company’s indirect lending portfolio (included in consumer loans to individuals) increased $40.5
million to $100.9 million as of December 31, 2018.
ALLOWANCE FOR LOAN LOSSES AND NON-PERFORMING ASSETS
The allowance for loan losses totaled $8,452,000 as of December 31, 2018 and represented 0.99% of total
loans receivable compared to $7,634,000 and 1.00% of total loans as of year-end 2017. Net charge-offs for
2018 totaled $907,000 and represented 0.11% of average loans compared to $1,029,000 and 0.14% of average
loans in 2017.
Non-performing assets consist of non-performing loans and real estate owned as a result of foreclosure,
which is held for sale. Loans are placed on non-accrual status when management believes that a borrower’s
financial condition is such that collection of interest is doubtful. Commercial and real estate related loans are
generally placed on non-accrual when interest is 90 days delinquent. When loans are placed on non-accrual,
unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is
charged against the allowance for loan losses.
4
5
NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT As of December 31, 2018, non-performing loans totaled $1,140,000 and represented 0.13% of total loans
compared to $2,479,000 or 0.32% as of December 31, 2017. The decrease in the level of non-performing
loans reflects the resolution of loan workout efforts on several residential real estate properties. Based on
management’s analysis, the Company added $1,725,000 to the allowance for loan losses for the year ended
December 31, 2018 compared to $2,200,000 in 2017.
Foreclosed real estate owned totaled $1,115,000 as of December 31, 2018 and $1,661,000 as of December
31, 2017. During 2018, seven properties with a carrying value of $654,000 were disposed of through sales.
The Company recorded a net gain of $95,000 from the sale of the properties.
Management assesses the adequacy of the allowance for loan losses on a quarterly basis. The process
includes a review of the risks inherent in the loan portfolio. It also includes an analysis of impaired loans and a
historical review of losses. Other factors considered in the analysis include: concentrations of credit in specific
industries in the commercial portfolio, the local and regional economic conditions, trends in delinquencies,
internal risk rating classifications, and growth in the portfolio. For loans acquired, including those that are
not deemed impaired at acquisition, credit discounts representing the principal losses expected over the life
of the loan are a component of the initial fair value. Subsequent to the purchase date, the methods utilized to
estimate the required allowance for credit losses for these loans is similar to originated loans; however, the
Company records a provision for loan losses only when the required allowance exceeds any remaining
credit discounts.
The Company has limited exposure to higher-risk loans. The Company does not originate option ARM
products, interest only loans, sub-prime loans or loans with initial teaser rates in its residential real estate
portfolio. The Company has $10,341,000 of junior lien home equity loans. For 2018, there were no charge-offs
for this portfolio.
As of December 31, 2018, the Company considered its concentration of credit risk profile to be acceptable.
The highest concentrations are in commercial rentals and the hospitality lodging industry.
During 2018, the Company recognized an increase in its adversely classified loans due primarily to the
transfer of two loan relationships with a balance of $2.8 million to substandard during 2018. Based on current
analysis, the loans appear to be adequately collateralized, but were classified due to the inability to make
timely payments to support the credits. The Company assesses a loss factor against the classified loans, which
is based on prior experience. Classified loans which are considered impaired are measured on a loan-by-loan
basis. The Company values such loans by either the present value of expected cash flows, the loan’s obtainable
market price or the fair value of collateral if the loan is collateral dependent.
At December 31, 2018, the recorded investment in impaired loans, not requiring an allowance for loan
losses was $1,319,000 (net of charge-offs against the allowance for loan losses of $428,000). There were no
loans requiring an allowance. The recorded investment in impaired loans not requiring an allowance for loan
losses was $1,247,000 (net of charge-offs of $277,000) and there were no loans requiring an allowance as of
December 31, 2017.
As a result of its analysis, after applying these factors, management considers the allowance as of December
31, 2018, adequate. However, there can be no assurance that the allowance for loan losses will be adequate to
cover significant losses, that might be incurred in the future.
6
7
NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT The following table sets forth information with respect to the Company’s allowance for loan losses at the
dates indicated:
Allowance balance at beginning of period
Charge-offs:
Real Estate loans
Residential
Commercial
Construction
Commercial loans
Consumer loans
Total
Recoveries:
Real Estate loans
Residential
Commercial
Construction
Commercial loans
Consumer loans
Total
Provision expense
Allowance balance at end of period
Allowance for loan losses as a percent
of total loans outstanding
Net loans charged off as a percent of
average loans outstanding
Allowance coverage of non-performing loans
2018
$
7,634
(197)
(283)
(246)
-
(263)
(989)
9
33
-
8
32
82
1,725
8,452
$
0.99%
$
0.11%
7.4x
2017
Year-ended December 31,
(dollars in thousands)
2016
2015
2014
$
6,463
$
7,298
$
5,875
$ 5,708
(83)
(902)
(28)
-
(207)
(1,220)
6
159
-
-
26
191
2,200
7,634
(123)
(2,711)
-
(15)
(102)
(2,951)
(224)
(2,883)
-
-
(91)
(3,198)
(270)
(1,196)
-
-
(80)
(1,546)
6
15
-
-
45
66
2,050
6,463
20
-
-
-
21
41
4,580
7,298
$
$
-
2
-
-
31
33
1,680
$ 5,875
1.00%
0.91%
1.30%
1.17%
0.14%
3.1x
0.46%
3.4x
0.60%
1.0x
0.30%
1.1x
6
7
NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
The following table sets forth information regarding non-performing assets:
Non-accrual loans:
Real Estate loans
Residential
Commercial
Construction
Commercial loans
Consumer loans
Total
Accruing loans which are contractually
past due 90 days or more
Total non-performing loans
Foreclosed real estate
Total non-performing assets
Non-performing loans to total loans
Non-performing loans to total assets
Non-performing assets to total assets
SECURITIES
2018
$
798
342
-
-
-
1,140
-
1,140
1,115
2,255
$
2017
December 31,
(dollars in thousands)
2016
2015
2014
$
1,706
277
-
-
-
1,983
$
1,136
762
28
-
-
1,926
$
440
6,649
-
43
-
7,132
$ 1,675
3,921
-
-
4
5,600
496
1
-
-
2,479
1,661
4,140
1,927
5,302
7,229
7,132
2,847
9,979
$
$
5,600
3,726
$ 9,326
0.32%
0.27%
1.27%
1.12%
0.22%
0.17%
0.95%
0.79%
0.37%
0.65%
1.33%
1.31%
0.13%
$
0.10%
0.19%
The securities portfolio consists of mortgage-backed securities issued by government sponsored entities,
municipal obligations, and corporate debt. The Company classifies its investments into two categories: held to
maturity (HTM) and available for sale (AFS). The Company does not have trading securities. Securities
classified as HTM are those in which the Company has the ability and the intent to hold the security until
contractual maturity. As of December 31, 2018, there were no securities carried in the HTM portfolio.
Securities classified as AFS are eligible to be sold due to liquidity needs or interest rate risk management.
These securities are adjusted to and carried at their fair value with any unrealized gains or losses recorded net
of deferred income taxes, as an adjustment to capital and reported in the equity section of the Consolidated
Balance Sheet as other comprehensive income. As of December 31, 2018, $243.3 million of securities were so
classified and carried at their fair value, with unrealized losses, net of tax, of $5.6 million included in
accumulated other comprehensive loss as a component of stockholders’ equity.
As of December 31, 2018, the average life of the portfolio was 5.3 years. The Company has maintained a
relatively short average life in the portfolio in order to generate cash flow to support loan growth and maintain
liquidity levels. Purchases for the year totaled $15.5 million, while maturities and cash flow totaled $30.9
million and proceeds from sales were $17.7 million. The purchases were funded principally by cash flow
generated from the portfolio and excess overnight liquidity.
8
9
NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
The carrying value of the securities portfolio at December 31 is as follows:
2018
2017
(dollars in thousands)
U.S. Treasury securities
States and political subdivisions
Corporate obligations
Mortgage-backed securities –
government sponsored entities
Total
$
Carrying
-
Value
97,613
8,640
% of
-%
portfolio
40.1%
3.6%
137,024
$ 243,277
56.3%
100.0%
Carrying
Value
1,998
120,478
9,989
% of
portfolio
0.7%
42.9%
3.5%
148,656
281,121
52.9%
100.0%
$
$
The portfolio had no adjustable-rate instruments as of December 31, 2018 and 2017. The portfolio
contained no private label mortgage-backed securities, collateralized debt obligations (CDOs), or trust
preferred securities, and no off-balance sheet derivatives were in use. As of December 31, 2018, the portfolio
did not contain any step-up bonds. The mortgage-backed securities portfolio includes pass-through bonds and
collateralized mortgage obligations (CMO’s) issued by Fannie Mae, Freddie Mac and the Government National
Mortgage Association (GNMA).
The Company evaluates the securities in its portfolio for other-than-temporary-impairment (OTTI) as fair
value declines below cost. In estimating OTTI, management considers (1) the length of time and the extent of
the decline in fair value and (2) the financial condition and near-term prospects of the issuer. As of December
31, 2018, the Company held 231 investment securities in a loss position, which had a combined unrealized
loss of $7.4 million. Management believes that these losses are principally due to changes in interest rates and
represent temporary impairment as the Company does not have the intent to sell these securities and it is
more likely than not that it will not have to sell the securities before recovery of their cost basis. No impairment
charges were recognized in 2018 or 2017.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company uses fair value measurements to record fair value adjustments to certain financial instruments
and determine fair value disclosures (see Note 14 of Notes to the Consolidated Financial Statements).
Approximately $243.3 million, which represents 20.5% of total assets at December 31, 2018, consisted
of financial instruments recorded at fair value on a recurring basis. This amount consists entirely of the
Company’s available for sale securities portfolio. The Company uses valuation methodologies involving
market-based or market-derived information, collectively Level 1 and 2 measurements, to measure fair value.
There were no transfers into or out of Level 3 for any instruments for the years ending December 31, 2018
and 2017.
The Company utilizes a third party provider to perform valuations of the investments. Methods used to
perform the valuations include: pricing models that vary based on asset class, available trade and bid
information, actual transacted prices, and proprietary models for valuations of state and municipal
obligations. In addition, the Company has a sample of fixed-income securities valued by another independent
source. The Company does not adjust values received from its providers, unless it is evident that fair value
measurement is not consistent with the Company’s policies.
8
9
NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
The Company also utilizes a third party provider to provide the fair value of certain loan servicing rights.
Fair value for the purpose of this measurement is defined as the amount at which the asset could be
exchanged in a current transaction between willing parties, other than in a forced liquidation. The fair value
of mortgage servicing rights as of December 31, 2018 and 2017 was $220,000 and $223,000, respectively.
DEPOSITS
The Company, through the Community Offices of the Bank, provides a full range of deposit products to its
retail and business customers. These products include interest-bearing and non-interest bearing transaction
accounts, statement savings and money market accounts. Time deposits consist of certificates of deposit (CDs)
with terms of up to five years and include Individual Retirement Accounts. The Bank participates in the Jumbo
CD ($100,000 and over) markets with local municipalities and school districts, which are typically awarded on
a competitive bid basis. The Company has $9.8 million of brokered deposits through its participation in the
Certificate of Deposit Account Registry Service (CDARS).
Total deposits as of December 31, 2018, totaled $946.8 million, increasing $17.4 million from year-end
2017. Deposit growth included a $24.9 million increase in certificates of deposit and a $7.5 million increase
in savings deposits. The large increase in certificates of deposit includes deposits of local municipalities and
school districts as well as a $9.8 million increase in CDARS deposits. Non-interest-bearing demand deposits
decreased $3.7 million during 2018, while all other interest-bearing deposits decreased $11.3 million.
Time deposits over $250,000, which consist principally of school district funds, other public funds and
short-term deposits from large commercial customers with maturities generally less than one year, totaled
$112.7 million as of December 31, 2018, compared to $92.5 million at year-end 2017. These deposits are
subject to competitive bid and the Company bases its bid on current interest rates, loan demand, investment
portfolio structure and the relative cost of other funding sources.
As of December 31, 2018, non-interest bearing demand deposits totaled $201.5 million compared to $205.1
million at year-end 2017. Cash management accounts in the form of securities sold under agreements to
repurchase included in short-term borrowings, totaled $37.5 million at year end 2018 compared to $24.3
million as of December 31, 2017. These balances represent commercial and municipal customers’ funds
invested in overnight securities. The Company considers these accounts as a source of core funding.
MARKET RISK
Interest rate sensitivity and the repricing characteristics of assets and liabilities are managed by the Asset
and Liability Management Committee (ALCO). The principal objective of the ALCO is to maximize net interest
income within acceptable levels of risk, which are established by policy. Interest rate risk is monitored and
managed by using financial modeling techniques to measure the impact of changes in interest rates.
Net interest income, which is the primary source of the Company’s earnings, is impacted by changes in
interest rates and the relationship of different interest rates. To manage the impact of the rate changes, the
balance sheet should be structured so that repricing opportunities exist for both assets and liabilities at
approximately the same time intervals. The Company uses net interest simulation to assist in interest rate risk
management. The process includes simulating various interest rate environments and their impact on net
interest income. As of December 31, 2018, the level of net interest income at risk in a ± 200 basis points
increase was within the Company’s policy limit of a decline less than 8% of net interest income.
10
11
NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
Imbalances in repricing opportunities at a given point in time reflect interest-sensitivity gaps measured as
the difference between rate-sensitive assets and rate-sensitive liabilities. These are static gap measurements
that do not take into account any future activity, and as such are principally used as early indicators of
potential interest rate exposures over specific intervals.
At December 31, 2018, the Bank had a negative 90-day interest sensitivity gap of $18.7 million or 1.6% of
total assets. A negative gap indicates that the balance sheet has a higher level of rate-sensitive liabilities (RSL)
than rate-sensitive assets (RSA) at the specific time interval. This would indicate that in an increasing rate
environment, the cost of interest-bearing liabilities would increase faster than the yield on interest-earning
assets in the 90-day period. The level of RSA and RSL for an interval is managed by ALCO strategies, including
adjusting the average life of the investment portfolio through purchases and sales, pricing of deposit liabilities
to attract long or short-term time deposits, utilizing borrowings to fund loan growth, loan pricing to encourage
variable-rate products and evaluation of loan sales of long-term, fixed-rate mortgages.
The Company analyzes and measures the time periods in which RSA and RSL will mature or reprice in
accordance with their contractual terms and assumptions. Management believes that the assumptions used
are reasonable. The interest rate sensitivity of assets and liabilities could vary substantially if differing
assumptions were used or if actual experience differs from the assumptions used in the analysis. For example,
although certain assets and liabilities may have similar maturities or periods to repricing, they may react in
differing degrees to changes in market interest rates. The interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may
lag behind changes in market rates. Interest rates may change at different rates changing the shape of the yield
curve. The level of rates on the investment securities may also be affected by the spread relationship between
different investments. Further, in the event of a significant change in interest rates, prepayment and early
withdrawal levels would likely deviate significantly from those assumed. Finally, the ability of borrowers to
service their adjustable-rate debt may decrease in the event of an interest rate increase. It should be noted
that the operating results of the Company are not subject to foreign currency exchange or commodity
price risk.
10
11
NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
The following table displays interest-sensitivity as of December 31, 2018 (dollars in thousands):
Federal funds sold and
interest-bearing deposits
Securities
Loans Receivable
Total Rate Sensitive Assets (RSA)
Non-maturity interest-bearing deposits
Time Deposits
Borrowings
Total Rate Sensitive Liabilities (RSL)
Interest sensitivity gap
Cumulative gap
RSA/RSL-cumulative
As of December 31, 2017
Interest sensitivity gap
Cumulative gap
RSA/RSL-cumulative
3 Months
or Less
3-12
Months
1-3 Years
Over
3 Years
Total
$
309
6,783
135,274
$ 142,366
$ 59,548
73,679
27,888
$ 161,115
$
-
16,782
155,243
$ 172,025
$
-
53,209
256,479
$ 309,688
$
-
166,503
303,186
$ 469,689
$
309
243,277
850,182
$ 1,093,768
$ 59,173
139,107
34,536
$ 232,816
$ 156,683
98,699
35,454
$ 290,836
$ 124,741
33,692
7,452
$ 165,885
$ 400,145
345,177
105,330
$ 850,652
$ (18,749)
(18,749)
88.4%
$ (60,791)
(79,540)
79.8%
$
18,852
(60,688)
$ 303,804
243,116
91.1%
128.6%
$ 243,116
$ 20,327
20,327
115.9%
$ (34,969)
(14,642)
95.8%
$
(6,925) $ 264,544
242,977
(21,567)
96.6%
130.3%
$ 242,977
Certain interest-bearing deposits with no stated maturity dates are included in the interest-sensitivity table
above. The balances allocated to the respective time periods represent an estimate of the total outstanding
balance that has the potential to migrate either through withdrawal or transfer to time deposits, thereby
impacting the interest-sensitivity position of the Company. The estimates were derived from a non-maturity
deposit study, which was prepared by an independent third party provider. The purpose of the study was to
estimate the average lives of various deposit types and their pricing sensitivity to movements in market
interest rates.
LIQUIDITY
Liquidity is the ability to fund customers’ borrowing needs and their deposit withdrawal requests while
supporting asset growth. The Company’s primary sources of liquidity include deposit generation, asset
maturities, cash flow from payments on loans and securities and access to borrowing from the Federal Home
Loan Bank and other correspondent banks.
As of December 31, 2018, the Company had cash and cash equivalents of $18.3 million in the form of cash,
due from banks, balances with the Federal Reserve Bank, and short-term deposits with other institutions. In
addition, the Company had total securities available for sale of $243.3 million, which could be used for
liquidity needs. This totals $261.6 million and represents 22.1% of total assets compared to $297.8 million
and 26.3% of total assets as of December 31, 2017. The Company also monitors other liquidity measures, all of
which were within the Company’s policy guidelines as of December 31, 2018. Based upon these measures, the
Company believes its liquidity position is adequate.
12
13
NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
The Company maintains established lines of credit with the Federal Home Loan Bank of Pittsburgh (FHLB),
the Atlantic Community Bankers Bank (ACBB) and other correspondent banks, which support liquidity needs.
The total available under all the lines was $190.0 million, with $15.6 million outstanding at December 31,
2018 and $18.2 million outstanding at December 31, 2017. The maximum borrowing capacity from FHLB was
$398.9 million. As of December 31, 2018, the Company had $52.3 million in term borrowings from the FHLB,
compared to $35.9 million at December 31, 2017.
OFF-BALANCE SHEET ARRANGEMENTS
The Company’s financial statements do not reflect various commitments that are made in the normal course
of business, which may involve some liquidity risk. These commitments consist mainly of unfunded loans and
letters of credit made under the same standards as on-balance sheet instruments. Unused commitments, as
of December 31, 2018 totaled $121.4 million. They consisted of $45.3 million of commitments for residential
and commercial real estate, construction and land development loans, $26.4 million in unused home equity
lines of credit, $4.3 million in performance and standby letters of credit and $45.4 million in other unused
commitments, principally commercial lines of credit. Because these instruments have fixed maturity dates
and many of them will expire without being drawn upon, management believes they do not represent any
significant liquidity risk.
Management believes that any amounts actually drawn upon can be funded in the normal course of
operations. The Company has no investment in or financial relationship with any unconsolidated entities that
are reasonably likely to have a material effect on liquidity or the availability of capital resources.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is the most significant source of revenue for the Company and represented 83.9% of
total revenue for the year ended December 31, 2018. Net interest income (fte) totaled $37,899,000 for the
year ended December 31, 2018 compared to $37,090,000 for 2017, an increase of $809,000. The resulting fte
net interest spread and net interest margin were 3.36% and 3.53%, respectively, in 2018 compared to 3.44%
and 3.56%, respectively, in 2017. The reduction in the net interest spread and net interest margin reflect the
lower tax-equivalent adjustment due to the reduced corporate tax rate resulting from the enactment of the Tax
Cuts and Jobs Act.
Interest income (fte) for the year ended December 31, 2018 totaled $43,556,000 compared to $41,170,000
in 2017. The fte yield on average earning assets was 4.06%, increasing 11 basis points from the 3.95%
reported last year. The tax-equivalent yield on total loans improved 10 basis points to 4.60% in 2018, while
average loans outstanding increased $63.2 million, resulting in an increase in interest income (fte) from loans
of $3.6 million. The yield on securities decreased 15 basis points in 2018 due primarily to the reduced tax-
equivalent adjustment on municipal securities. Average securities outstanding decreased $31.1 million as cash
flow from the portfolio was utilized to fund loan growth, and interest income (fte) from the portfolio
decreased $1.2 million.
12
13
NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
Interest expense was $5,657,000 in 2018 which resulted in an average cost of interest-bearing liabilities
of 0.70% compared to total interest expense of $4,080,000 in 2017 with an average cost of 0.51%.
Total interest-bearing deposits cost 0.63% in 2018, which was an increase of 17 basis points over the prior
year. Non-maturity deposit rates increased slightly, but time certificates of deposit repriced to current market
rates upon maturity and new growth was added, resulting in an increase in the rate paid from 0.98% in 2017
to 1.27%. Long-term borrowings also repriced upward in 2018 reflecting the impact from higher cost
borrowings added in 2018.
OTHER INCOME
Other income totaled $7,065,000 for the year ended December 31, 2018 compared to $6,911,000 in 2017,
an increase of $154,000. Gains from the sales of loans and securities decreased $187,000 from the prior year,
while all other items of other income increased $341,000, net. The increase reflects a higher level of service
charges and fees on deposits.
Other Income (dollars in thousands)
For the year-ended December 31
Service charges on deposit accounts
ATM Fees
Overdraft Fees
Safe deposit box rental
Loan related service fees
Debit card
Fiduciary activities
Commissions on mutual funds & annuities
Gain on sales of loans
Earnings on and proceeds from bank-owned life insurance
Other income
Net realized gains on sales of securities
Total
OTHER EXPENSES
2018
263
398
1,505
96
563
1,330
589
185
15
1,126
782
6,852
213
7,065
$
$
2017
$
255
362
1,639
100
445
1,186
510
146
67
1,133
720
6,563
348
$ 6,911
Other expenses totaled $25,975,000 for the year ended December 31, 2018 compared to $24,870,000 in the
prior year. The $1,105,000 increase in costs reflects a higher level of salaries and employee benefits costs,
which increased $1,170,000 in 2018, and increased occupancy expenses, which increased $227,000. All other
operating expenses decreased $292,000, net, which includes a $992,000 decrease in foreclosed real estate
costs. The Company’s efficiency ratio, which measures total other expenses as a percentage of net interest
income (fte) plus other income, was 57.8% in 2018 compared to 56.5% in 2017. The increase is due to the
lower tax-equivalent adjustment related to the reduced corporate tax rate.
14
15
NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
Other Expenses (dollars in thousands)
For the year ended December 31
Salaries
Employee benefits
Occupancy
Furniture and equipment
Data processing and related operations
Federal Deposit Insurance Corporation insurance assessment
Advertising
Professional fees
Postage and telephone
Office supplies
Taxes, other than income
Foreclosed real estate
Amortization of intangible assets
Other
Total
INCOME TAXES
$
2018
8,695
5,325
2,889
806
1,427
347
257
993
705
413
572
172
126
3,248
$ 25,975
2017
$ 8,317
4,533
2,662
699
1,353
377
268
949
664
426
661
1,164
150
2,647
$ 24,870
Income tax expense for the year ended December 31, 2018 totaled $2,553,000, which resulted in an effective
tax rate of 15.8% compared to $6,551,000 and 44.4% for 2017. On December 22, 2017, the President signed
the Tax Cut and Jobs Act (the “Act”) into law. Among other things, the Act reduced the corporate tax rate from
a maximum of 35% to a flat 21% rate effective January 1, 2018. Prior to December 22, 2017, the Company had
a net deferred tax asset totaling $7.6 million, based on the pre-Act federal tax rate of 35%. As a result of the
reduction in the corporate income tax rate to 21%, the Company revalued its net deferred tax asset as of
December 31, 2017, which resulted in a $3,060,000 reduction in its value. The reduction in the value of the
net deferred tax asset was recorded as additional income tax expense in 2017. Excluding this one-time
adjustment, the effective tax rate for 2017 would have been 23.7%.
CAPITAL AND DIVIDENDS
Total stockholders’ equity as of December 31, 2018, was $122.3 million, compared to $115.7 million as of
year-end 2017. The increase was due primarily to earnings retention net of a $5.6 million reduction resulting
from cash dividends declared. As of December 31, 2018 the Company had a leverage capital ratio of 9.82%, a
Tier 1 risk-based capital ratio and a common equity Tier 1 risk-based capital ratio of 13.04% and a total risk-
based capital ratio of 14.00%, compared to 9.36%, 13.16% and 14.11%, respectively, at December 31, 2017.
The Company’s common stock is traded on the Nasdaq Global Market under the symbol, NWFL. As of
December 31, 2018, there were approximately 2,600 shareholders based on transfer agent mailings.
14
15
NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
The following table sets forth the price range and cash dividends declared per share regarding common
stock for the periods indicated:
Year 2018
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year 2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Closing Price Range
$
$
High
33.00
38.86
40.41
39.06
27.93
28.34
29.52
34.91
$
$
Low
28.85
29.02
34.51
30.30
21.24
24.65
26.71
28.00
Cash dividends
Declared per share
$
0.220
0.220
0.220
0.240
$
0.213
0.213
0.220
0.220
The book value of the common stock was $19.43 per share as of December 31, 2018 compared to $18.61 per
share as of December 31, 2017. As of year-end 2018, the closing stock price was $33.00 per share, compared
to $33.00 as of December 31, 2017. All per share information has been adjusted to reflect the 50% stock
dividend declared in 2017.
NON-GAAP FINANCIAL MEASURES
This annual report contains or references tax-equivalent interest income and net interest income, which are
non-GAAP financial measures. Tax-equivalent interest income and net interest income are derived from GAAP
interest income and net interest income using a marginal tax rate of 21% for 2018 and 34% for 2017. We
believe the presentation of interest income and net interest income on a tax-equivalent basis ensures
comparability of interest income and net interest income arising from both taxable and tax-exempt sources
and is consistent with industry practice. This annual report also references core operating results, core
operating results per diluted share, core operating results return on average assets and core operating results
return on average equity which are also a non-GAAP financial measure. Core operating results excludes the
$3,060,000 of non-recurring additional income tax expense recorded in 2017 resulting from the revaluation of
our net deferred tax asset as required by the Tax Cuts and Jobs Act. We believe this presentation provides the
reader with a more concise understanding of the impact from the required revaluation of deferred tax assets
and facilitates period-to-period comparisons. Tax-equivalent net interest income is reconciled to GAAP net
interest income on page 19. A reconcilement of core operating results is located below. Although the Company
believes that these non-GAAP financial measures enhance investors’ understanding of our business and
performance, these non-GAAP financial measures should not be considered an alternative to GAAP measures.
The following table reconciles net income to core operating results:
(dollars in thousands)
Net income
Add: net deferred tax asset revaluation charge
Core operating results
Year ended December 31,
2018
2017
$ 13,651
$ 13,651
-
$
8,198
3,060
$ 11,258
16
17
NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
The following table reconciles diluted earnings per share to core operating results per diluted share:
Year ended December 31,
Diluted earnings per share
Add: net deferred tax asset revaluation charge
Core operating results per diluted share
2018
2017
$
$
2.17
.0-
2.17
$
$
1.31
0.49
1.80
The following table reconciles return on average assets to core operating results return on average assets:
Year ended December 31,
Return on average assets
Add: net deferred tax asset revaluation charge
Core operating results return on average assets
2018
2017
1.19%
-
1.19%
.0
0.73%
0.29
1.02%
The following table reconciles return on average equity to core operating results return on average equity:
Year ended December 31,
Return on average equity
Add: net deferred tax asset revaluation charge
Core operating results return on average equity
2018
2017
11.71%
.0 -
11.71%
7.04%
3.35
10.39%
16
17
NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
STOCK PERFORMANCE GRAPH
Set forth below is a stock performance graph comparing the cumulative total shareholder return on the
Common Stock with (a) the cumulative total stockholder return on stocks included in the Nasdaq Stock Market
index and (b) the cumulative total stockholder return on stocks included in the Nasdaq Bank index, as
prepared by Zack’s Investment Research, Inc. using data from the Center for Research in Securities Prices
(CRSP) at the University of Chicago. All three investment comparisons assume the investment of $100 at the
market close on December 31, 2013 and the reinvestment of dividends paid. The graph provides comparison
at December 31, 2013 and each fiscal year through December 31, 2018.
There can be no assurance that the Company’s future stock performance will be the same or similar to the
historical performance shown in the above graph. The Company neither makes nor endorses any predictions
as to stock performance.
Legend
CRSP Total Returns Index for:
Norwood Financial Corp
CRSP Nasdaq U.S. Index
Nasdaq Bank Index
12/31/13
12/31/14
12/31/15 12/31/16 12/31/17
12/31/18
$100.00
$112.61
$116.31
$140.10
$216.30
$222.05
100.00
115.31
124.20
136.36
145.76
143.37
100.00
105.08
114.45
154.96
165.09
137.08
Symbol
♦
■
▲
Notes:
A. Data complete through last fiscal year.
B. Corporate Performance Graph with peer group only performance (excludes only company).
C. Peer group indices use beginning of period market capitalization weighting.
D. Prepared by Zacks Investment Research, Inc. Used with permission. All rights reserved. Copyright 1980-2019.
E. Index Data: Calculated (or Derived) based from CRSP NASDAQ Stock Market (US Companies) and CRSP NASDAQ Banks Index, Center for
Research in Security Prices (CRSP®), Graduate School of Business, The University of Chicago. Copyright 2019. Used with permission.
All rights reserved.
18
19
NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
CONSOLIDATED AVERAGE BALANCE SHEETS WITH RESULTANT INTEREST
AND RATES
(Tax-Equivalent Basis, dollars in thousands)
Year Ended December 31
2018
2017
ASSETS
Average
Balance (2)
Interest (1)
Average
Rate
Average
Balance (2)
Interest (1)
Average
Rate
$
3,978
$
73
1.84%
167,443
101,525
268,968
800,957
3,573
3,096
6,669
36,814
1,073,903
43,556
2.13
3.05
2.48
4.60
4.06
$
4,742
$
48
1.01%
180,087
119,991
300,078
737,765
3,548
4,345
7,893
33,229
1.97
3.62
2.63
4.50
1,042,585
41,170
3.95
Interest-earning assets:
Interest-bearing deposits
with banks
Securities available for sale:
Taxable
Tax-exempt
Total securities
available for sale
Loans receivable (3)(4)
Total interest-
earning assets
Noninterest-earning assets:
Cash and due from banks
Allowance for loan losses
Other assets
TOTAL ASSETS
Total noninterest-
earning assets
14,583
(8,259)
67,441
73,765
$ 1,147,668
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Interest-bearing demand
and money market
$ 233,929
178,203
322,768
Savings
Time
Total interest-
bearing deposits
Short-term borrowings
Other borrowings
Total interest-
bearing liabilities
Noninterest-bearing liabilities:
Noninterest-bearing
demand deposits
Other liabilities
Total noninterest-
TOTAL LIABILITIES AND
bearing liabilities
STOCKHOLDERS’ EQUITY
Stockholders’ equity
734,900
41,963
36,606
813,469
208,222
9,439
217,661
116,538
$ 1,147,668
Net Interest Income/spread
(tax equivalent basis)
Tax-equivalent basis adjustment
Net Interest Income
Net interest margin
(tax equivalent basis)
14,193
(7,416)
76,427
83,204
$ 1,125,789
$ 245,717
189,548
293,641
728,906
39,170
31,276
466
90
4,088
4,644
323
690
5,657
0.20
0.05
1.27
0.63
0.77
1.88
0.70
406
95
2,876
3,377
199
504
0.17
0.05
0.98
0.46
0.51
1.61
799,352
4,080
0.51
200,368
9,662
210,030
116,407
$ 1,125,789
37,899
(1,060)
$ 36,839
3.36%
3.53%
37,090
(2,182)
$ 34,908
3.44%
3.56%
18
19
1. Interest and yields are presented on a tax-equivalent basis using a marginal tax rate of 21% for 2018 and 34% for 2017.
2. Average balances have been calculated based on daily balances.
3. Loan balances include non-accrual loans and are net of unearned income.
4. Loan yields include the effect of amortization of purchased credit marks and deferred fees net of costs.
NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
RATE/VOLUME ANALYSIS
The following table shows the fully taxable equivalent effect of changes in volumes and rates on interest income
(dollars in thousands)
and interest expense.
Increase/(Decrease)
2018 compared to 2017
Variance due to
2017 compared to 2016
Variance due to
INTEREST EARNING ASSETS:
Interest-bearing deposits
Securities available for sale:
Taxable
Tax-exempt securities
Total securities available
for sale
Loans receivable
Total interest-earning assets
INTEREST BEARING LIABILITIES:
Interest-bearing demand
and money market
Savings
Time
Total interest-bearing deposits
Short-term borrowings
Other borrowings
Total interest-bearing liabilities
$
Net interest income
(tax-equivalent basis)
Volume
Rate
Net
Volume
Rate
Net
$
(12)
$
37
$
25
(256)
(616)
(872)
2,811
1,927
(21)
(5)
343
317
21
93
431
281
(633)
(352)
774
459
81
-
869
950
103
93
1,146
25
(1,249)
(1,224)
3,585
2,386
60
(5)
1,212
1,267
124
186
1,577
1,496
$ (687)
$
809
$
(25)
$
31
$
6
1,102
1,346
2,448
5,011
7,434
50
29
563
642
(11)
(95)
536
71
(359)
(288)
-
(257)
20
-
112
132
36
(278)
(110)
1,173
987
2,160
5,011
7,177
70
29
675
774
25
(373)
426
$ 6,898
$ (147)
$ 6,751
Changes in net interest income that could not be specifically identified as either a rate or volume change were
allocated proportionately to changes in volume and changes in rate.
20
21
NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
REPORT ON MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER
FINANCIAL REPORTING
TO THE STOCKHOLDERS OF NORWOOD FINANCIAL CORP
Management of Norwood Financial Corp and its subsidiary (Norwood) is responsible for establishing and
maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act of 1934. Norwood’s internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of the
consolidated financial statements for external purposes in accordance with accounting principles generally
accepted in the United States of America.
Norwood’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of Norwood; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that our receipts and expenditures are being made only in accordance with authorizations of
Norwood’s management and directors; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of Norwood’s assets that could have a material effect
on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Management assessed the effectiveness of Norwood’s internal control over financial reporting as of
December 31, 2018. In making this assessment, management used the criteria established in Internal Control
– Integrated Framework as set forth by the Committee of Sponsoring Organizations of the Treadway
Commission in 2013. Based upon its assessment, management has concluded that, as of December 31, 2018,
the Company’s internal control over financial reporting, including controls over the preparation of regulatory
financial statements in accordance with all federal and state laws and regulations, is effective based on the
criteria established in the Internal Control – Integrated Framework.
Norwood’s independent registered certified public accounting firm has audited the effectiveness of
Norwood’s internal control over financial reporting. Their report appears on page 23.
Lewis J. Critelli
President and
Chief Executive Officer
William S. Lance
Executive Vice President and
Chief Financial Officer
20
21
NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Norwood Financial Corp.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Norwood Financial Corp. and subsidiaries (the
“Company”) as of December 31, 2018 and 2017; the related consolidated statements of income, comprehensive
income, changes in stockholders’ equity, and cash flows for the years then ended; and the related notes to the
consolidated financial statements (collectively, the “financial statements”). In our opinion, the financial statements
present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and
the results of its operations and its cash flows for years then ended in conformity with accounting principles generally
accepted in the United States of America.
Internal Control – Integrated Framework
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria
established in
, issued by the Committee of Sponsoring Organizations of the
Treadway Commission in 2013, and our report dated March 13, 2019, expressed an unqualified opinion on the
effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company, in accordance with U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks.
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the financial statements. We believe that our
audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2009.
Cranberry Township, Pennsylvania
March 13, 2019
22
23
NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Opinion on Internal Control over Financial Reporting
To the Stockholders and the Board of Directors of Norwood Financial Corp.
We have audited Norwood Financial Corp. and subsidiaries’ (the “Company”) internal control over financial
reporting as of December 31, 2018, based on criteria established in
issued by
the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based
on criteria established in
, issued by the Committee of Sponsoring
Organizations of the Treadway Commission in 2013.
Internal Control – Integrated Framework
Internal Control – Integrated Framework,
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, and the related
consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the
Basis for Opinion
years then ended, of the Company, and our report dated March 13, 2019, expressed an unqualified opinion.
Report on
Management’s Assessment of Internal Control over Financial Reporting
The Company’s management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting in the accompanying
. Our responsibility is to express an opinion on
the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered
with the PCAOB and are required to be independent with respect to the Company, in accordance with U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as
Definition and Limitations of Internal Control over Financial Reporting
we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
22
23
Cranberry Township, Pennsylvania
March 13, 2019
NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT CONSOLIDATED BALANCE SHEETS
ASSETS
Cash and due from banks
Interest bearing deposits with banks
Cash and cash equivalents
Securities available for sale
Loans receivable (net of allowance for loan losses 2018: $8,452; 2017: $7,634)
Regulatory stock, at cost
Premises and equipment, net
Bank owned life insurance
Accrued interest receivable
Foreclosed real estate owned
Goodwill
Other intangibles
Other assets
Total Assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits:
Noninterest-bearing demand
Interest-bearing demand
Money market deposit accounts
Savings
Time
Total Deposits
Short-term borrowings
Other borrowings
Accrued interest payable
Other liabilities
Total Liabilities
STOCKHOLDERS’ EQUITY
Common stock, $.10 par value, authorized 10,000,000 shares,
issued: 2018: 6,295,113 shares; 2017: 6,256,063 shares
Surplus
Retained earnings
Treasury stock at cost: 2018: 2,470 shares; 2017: 2,608 shares
Accumulated other comprehensive loss
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
See notes to consolidated financial statements .
December 31,
2017
2018
(In Thousands, Except Share
and Per Share Data)
$
18,039
309
18,348
243,277
841,730
3,926
13,846
37,932
3,776
1,115
11,331
336
8,942
$ 1,184,559
$
201,457
88,917
137,636
173,593
345,177
946,780
53,046
52,284
1,806
8,358
1,062,274
$
16,212
485
16,697
281,121
756,458
3,505
13,864
37,060
3,716
1,661
11,331
462
7,041
$ 1,132,916
$
205,138
91,479
146,362
166,111
320,294
929,384
42,530
35,945
1,434
7,884
1,017,177
630
48,322
78,434
(81)
(5,020)
122,285
626
47,431
70,426
(77)
(2,667)
$ 1,184,559
115,739
$ 1,132,916
24
25
NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
CONSOLIDATED STATEMENTS OF INCOME
INTEREST INCOME
Years Ended December 31,
2018
2017
(In Thousands, Except
Share and Per Share Data)
$
36,404
Loans receivable, including fees
Securities
Taxable
Tax exempt
Total Interest Income
Other
INTEREST EXPENSE
Deposits
Short-term borrowings
Other borrowings
Total Interest Expense
Net Interest Income
PROVISION FOR LOAN LOSSES
Net Interest Income After Provision for Loan Losses
OTHER INCOME
Service charges and fees
Income from fiduciary activities
Net realized gains on sales of securities
Net gain on sale of loans
Earnings and proceeds on life insurance policies
Other
Total Other Income
OTHER EXPENSES
Salaries and employee benefits
Occupancy
Furniture and equipment
Data processing and related operations
Federal Deposit Insurance Corporation insurance assessment
Advertising
Professional fees
Postage and telephone
Taxes, other than income
Foreclosed real estate
Amortization of intangible assets
Other
Total Other Expenses
Income before Income Taxes
INCOME TAX EXPENSE
Net income
EARNINGS PER SHARE
BASIC
DILUTED
See notes to consolidated financial statements .
24
25
3,573
2,446
73
42,496
4,644
323
690
5,657
36,839
1,725
35,114
4,295
589
213
15
1,126
827
7,065
14,020
2,889
806
1,427
347
257
993
705
572
172
126
3,661
25,975
16,204
2,553
13,651
2.19
2.17
$
32,524
3,548
2,868
48
38,988
3,377
199
504
4,080
34,908
2,200
32,708
4,079
510
348
67
1,133
774
6,911
12,850
2,662
699
1,353
377
268
949
664
661
1,164
150
3,073
24,870
14,749
6,551
8,198
1.32
1.31
$
$
$
$
$
$
NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
NET INCOME
Other comprehensive (loss) income:
Unrealized gain (loss) on pension liability
Tax Effect
Investment securities available for sale:
Unrealized holding (losses) gains
Tax Effect
Reclassification of gains from sale of securities
Other comprehensive (loss) income
Tax Effect
COMPREHENSIVE INCOME
Years Ended December 31,
2018
2017
$
13,651
207
(43)
(2,973)
624
(213)
45
(2,353)
$
11,298
$
8,198
(17)
6
3,224
(1,097)
(348)
118
1,886
$
10,084
See notes to consolidated financial statements .
26
27
NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years Ended December 31, 2018 and 2017
Common Stock
Shares
Amount
Surplus
Retained Treasury Stock
Shares
Earnings
Amount
(Dollars in Thousands, Except Per Share Data)
Accumulated
Other
Comprehensive
Loss
Total
BALANCE - DECEMBER 31, 2016
Net Income
Other comprehensive income
Reclassification of certain income tax
effects from accumulated other
comprehensive income
Cash dividends declared ($0.87 per share)
Acquisition of treasury stock
Stock options exercised
Sale of treasury stock for ESOP
Compensation expense related to
stock options
Restricted stock awards
50% stock dividend
Cash-in-lieu stock dividend adjustment
BALANCE - DECEMBER 31, 2017
Net Income
Other comprehensive loss
Cash dividends declared ($0.90 per share)
Acquisition of treasury stock
Stock options exercised
Sale of treasury stock for ESOP
Compensation expense related to
stock options
Restricted stock awards
BALANCE - DECEMBER 31, 2018
4,164,723
-
-
$
416
-
-
$
47,682
-
-
$
67,225
8,198
-
$
4,509
-
-
(125)
-
-
$
(4,119)
-
1,886
$ 111,079
8,198
1,886
-
-
-
-
-
-
9,400
2,082,362
(422)
-
6,256,063
-
-
-
25,950
-
-
13,100
-
-
-
-
-
-
1
209
-
-
626
-
-
-
3
-
-
1
-
-
-
(291)
14
93
142
(209)
-
-
47,431
-
-
-
449
1
237
204
434
(5,412)
-
-
-
-
-
42,257
(44,219)
(3,847)
-
-
(19)
13,651
70,426
-
(5,643)
-
-
-
-
-
3,908
-
-
2,608
-
-
5,921
(2,325)
(3,734)
-
-
-
-
-
-
(1,587)
1,522
113
-
-
-
-
-
(77)
-
-
(194)
68
122
-
-
(434)
-
-
-
-
-
-
-
-
-
(2,667)
(2,353)
-
-
-
-
-
(5,412)
(1,587)
1,231
127
93
143
-
(19)
13,651
115,739
(2,353)
(5,643)
(194)
520
123
-
-
237
205
6,295,113
$
630
$
48,322
$
78,434
2,470
$
(81)
$
(5,020)
$ 122,285
See notes to consolidated financial statements .
26
27
NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses
Depreciation
Amortization of intangible assets
Deferred income taxes
Revaluation of deferred tax assets, net
Net amortization of securities premiums and discounts
Net realized gains on sales of securities
Gain on sales of deposits
Earnings and proceeds on life insurance policies
Loss on sales of fixed assets and foreclosed real estate owned
Net gain on sale of loans
Mortgage loans originated for sale
Proceeds from sale of loans originated for sale
Compensation expense related to stock options
Compensation expense related to restricted stock
Increase in accrued interest receivable
Increase in accrued interest payable
Other, net
Net Cash Provided by Operating Activities
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Proceeds from sales
Proceeds from maturities and principal reductions on mortgage-backed securities
Purchases
Purchase of regulatory stock
Redemption of regulatory stock
Net increase in loans
Purchase of premises and equipment
Proceeds from sales of foreclosed real estate owned
Proceeds from sales of bank premises and fixed assets
Net Cash Used for Investing Activities
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits
Deposits sold
Net increase in short-term borrowings
Repayments of other borrowings
Proceeds from other borrowings
Stock options exercised
Sale of treasury stock for ESOP
Acquisition of treasury stock
Cash dividends paid
Net Cash Provided by Financing Activities
Years Ended December 31,
2018
2017
(In Thousands)
$
13,651
1,725
895
126
24
-
1,711
(213)
-
(1,126)
26
(15)
(752)
767
237
205
(60)
372
(275)
17,298
17,745
30,873
(15,458)
(6,155)
5,734
(87,480)
(873)
776
-
(54,838)
17,396
-
10,516
(13,661)
30,000
520
123
(194)
(5,509)
39,191
$
8,198
2,200
922
150
(331)
3,060
2,115
(348)
(209)
(1,133)
774
(67)
-
-
93
142
(73)
365
193
16,051
15,612
26,893
(19,955)
(5,842)
4,456
(51,980)
(1,633)
3,341
515
(28,593)
17,867
(13,659)
9,719
(24,056)
28,000
1,040
127
(1,587)
(5,386)
Net Increase (Decrease) in Cash and Cash Equivalents
1,651
12,065
CASH AND CASH EQUIVALENTS - BEGINNING
CASH AND CASH EQUIVALENTS - ENDING
See notes to consolidated financial statements .
16,697
18,348
$
(477)
17,174
16,697
$
28
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NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest paid
Income taxes paid, net of refunds
Supplemental Schedule of Noncash Investing Activities
Transfers of loans to foreclosed real estate owned and repossession of other assets
Dividends payable
Years Ended December 31,
2018
2017
(In Thousands)
$
$
$
$
5,285
2,239
553
1,510
$
$
$
$
3,715
3,040
750
1,375
See notes to consolidated financial statements .
28
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NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
Norwood Financial Corp (Company) is a one bank holding company. Wayne Bank (Bank) is a
wholly-owned subsidiary of the Company. The Bank is a state-chartered bank headquartered in Honesdale,
Pennsylvania. The Company derives substantially all of its income from bank-related services which include
interest earnings on commercial mortgages, residential real estate mortgages, commercial and consumer
loans, as well as interest earnings on investment securities and fees from deposit services to its customers.
The Company is subject to regulation and supervision by the Federal Reserve Board while the Bank is subject
to regulation and supervision by the Federal Deposit Insurance Corporation and the Pennsylvania Department
of Banking and Securities.
Revenue Recognition
Revenue from Contracts with Customers –
Topic 606
Effective January 1, 2018, the Company adopted ASU 2014-09
and all subsequent ASCs that modified ASC 606. The Company has elected to apply the standard
utilizing the modified retrospective approach with a cumulative effect of adoption for the impact from
uncompleted contracts as the date of adoption. The implementation of the new standard had no material
impact to the measurement or recognition of revenue of prior periods.
Management determined that the primary sources of revenue emanating from interest income on loans and
investments along with noninterest revenue resulting from investment security gains, loan servicing, gains on
the sale of loans, commitment fees, and fees from financial guarantees are not within the scope of ASC 606.
As a result, no changes were made during the period related to these sources of revenue.
The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of
Topic 606, for the year ended December 31, 2018 (in thousands):
Noninterest Income
2018
In-scope of Topic 606:
Service charges on deposit accounts
ATM Fees
Overdraft Fees
Safe deposit box rental
Loan related service fees
Debit card
Fiduciary activities
Commissions on mutual funds & annuities
Other income
(in-scope of Topic 606)
Out-of-scope of Topic 606:
Noninterest Income
Net realized gains on sales of securities
Loan servicing fees
Gain on sales of loans
(out-of-scope of Topic 606)
Earnings on and proceeds from bank-owned life insurance
Total Noninterest Income
Noninterest Income
$
263
398
1,505
96
515
1,330
589
185
782
5,663
213
48
15
1,126
1,402
$
7,065
30
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NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiary, the Bank, and the Bank’s wholly-owned subsidiaries, WCB Realty Corp., Norwood Investment
Corp., Norwood Settlement Services, LLC and WTRO Properties. In June 2017, the Bank adopted a plan of
dissolution for Norwood Settlement Services, LLC. Effective May 29, 2018, the existence of Norwood
Settlement Services, LLC, was terminated. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. Material estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan losses, the valuation of deferred tax assets,
the determination of other-than-temporary impairment on securities, the determination of goodwill
impairment and the fair value of financial instruments.
Significant Group Concentrations of Credit Risk
Most of the Company’s activities are with customers located within its markets in Northeastern
Pennsylvania and the Southern Tier of New York. Note 3 discusses the types of securities that the Company
invests in. Note 4 discusses the types of lending that the Company engages in. The Company does not have any
significant concentrations to any one industry or customer.
Concentrations of Credit Risk
The Bank operates primarily in Wayne, Pike, Lackawanna and Monroe Counties, Pennsylvania and Delaware
and Sullivan Counties, New York. Accordingly, the Bank has extended credit primarily to commercial entities
and individuals in these areas whose ability to honor their contracts is influenced by the region’s economy.
These customers are also the primary depositors of the Bank. The Bank is limited in extending credit by legal
lending limits to any single borrower or group of related borrowers.
Securities
Securities classified as available for sale are those securities that the Company intends to hold for an
indefinite period of time but not necessarily to maturity. Any decision to sell a security classified as available
for sale would be based on various factors, including significant movement in interest rates, changes in
maturity mix of the Company’s assets and liabilities, liquidity needs, regulatory capital considerations and
other similar factors. Securities available for sale are carried at fair value. Unrealized gains and losses are
reported in other comprehensive income, net of the related deferred tax effect. Realized gains or losses,
determined on the basis of the cost of the specific securities sold, are included in earnings. Premiums and
discounts are recognized in interest income using a method which approximates the interest method over the
term of the security.
Bonds, notes and debentures for which the Company has the positive intent and ability to hold to maturity
are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the
interest method over the term of the security.
30
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NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Management determines the appropriate classification of debt securities at the time of purchase and
re-evaluates such designation as of each Consolidated Balance Sheet date.
Declines in the fair value of available for sale securities below their cost that are deemed to be other than
temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses,
management considers (1) the length of time and the extent to which the fair value has been less than cost,
(2) the financial condition and near-term prospects of the issuer, and (3) the intent of the Company to not sell
the securities and it is more likely than not that it will not have to sell the securities before recovery of their
cost basis.
Regulatory Stock
The Company, as a member of the Federal Home Loan Bank (FHLB) system is required to maintain an
investment in capital stock of its district FHLB according to a predetermined formula. This regulatory stock
has no quoted market value and is carried at cost.
Management evaluates the regulatory stock for impairment. Management’s determination of whether these
investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than
by recognizing temporary declines in value. The determination of whether a decline affects the ultimate
recoverability of their cost is influenced by criteria such as (1) the significance of the decline in net assets of
the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has
persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such
payments in relation to the operating performance of the FHLB, and (3) the impact of legislative and
regulatory changes on institutions and, accordingly, on the customer base of the FHLB. Management considers
the FHLB’s regulatory capital ratios, liquidity, and the fact that new shares of FHLB stock continue to change
hands at the $100 par value. Management believes no impairment charge is necessary related to FHLB stock
as of December 31, 2018.
Loans Receivable
Loans receivable that management has the intent and ability to hold for the foreseeable future or until
maturity or payoff are stated at their outstanding unpaid principal balances, net of an allowance for loan
losses and any deferred fees. Interest income is accrued on the unpaid principal balance. Loan origination fees
are deferred and recognized as an adjustment of the yield (interest income) of the related loans. The Company
is generally amortizing these amounts over the contractual life of the loan.
The accrual of interest is generally discontinued when the contractual payment of principal or interest has
become 90 days past due or management has serious doubts about further collectability of principal or
interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the
process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status,
unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is
charged against the allowance for loan losses. Interest received on nonaccrual loans generally is either applied
against principal or reported as interest income, according to management’s judgment as to the collectability
of principal. Generally, loans are restored to accrual status when the obligation is brought current, has
performed in accordance with the contractual terms for a reasonable period of time and the ultimate
collectability of the total contractual principal and interest is no longer in doubt.
32
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NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Troubled Debt Restructurings
A loan is considered to be a troubled debt restructuring (TDR) loan when the Company grants a concession
to the borrower because of the borrower’s financial condition that it would not otherwise consider. Such
concessions include the reduction of interest rates, forgiveness of principal or interest, or other modifications
of interest rates that are less than the current market rate for new obligations with similar risk.
Loans Acquired
Loans acquired including loans that have evidence of deterioration of credit quality since origination and for
which it is probable, at acquisition, that the Company will be unable to collect all contractually required
payments receivable, are initially recorded at fair value (as determined by the present value of expected future
cash flows) with no valuation allowance. Loans are evaluated individually to determine if there is evidence of
deterioration of credit quality since origination. The difference between the undiscounted cash flows expected at
acquisition and the investment in the loan, or the “accretable yield,” is recognized as interest income on a level-
yield method over the life of the loan. Contractually required payments for interest and principal that exceed the
undiscounted cash flows expected at acquisition, or the “non-accretable difference,” are not recognized as a yield
adjustment or as a loss accrual or a valuation allowance. Increases in expected cash flows subsequent to the
initial investment are recognized prospectively through adjustment of the yield on the loan over its remaining
estimated life. Decreases in expected cash flows are recognized immediately as impairment. Any valuation
allowances on these impaired loans reflect only losses incurred after the acquisition.
For purchased loans acquired that are not deemed impaired at acquisition, credit discounts representing
the principal losses expected over the life of the loan are a component of the initial fair value. Loans may be
aggregated and accounted for as a pool of loans if the loans being aggregated have common risk characteristics.
Subsequent to the purchase date, the methods utilized to estimate the required allowance for credit losses for
these loans is similar to originated loans; however, the Company records a provision for loan losses only when
the required allowance exceeds any remaining credit discounts. The remaining differences between the
purchase price and the unpaid principal balance at the date of acquisition are recorded in interest income over
the life of the loans.
Mortgage Servicing Rights
Servicing assets are recognized as separate assets when rights are acquired through purchase or through
the sale of financial assets. Capitalized servicing rights are reported in other assets and are amortized into
noninterest income in proportion to, and over the period of, the estimated future net servicing income of the
underlying financial assets. Servicing assets are evaluated for impairment based upon a third party appraisal.
Fair value is determined using prices for similar assets with similar characteristics, when available, or based
upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation
allowance to the extent that fair value is less than the capitalized amount. The Company’s loan servicing assets
at December 31, 2018 and 2017, respectively, were not impaired. Total servicing assets included in other
assets as of December 31, 2018 and 2017, were $178,000 and $200,000, respectively.
Allowance for Loan Losses
The allowance for loan losses is established through provisions for loan losses charged against income. Loans
deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any,
are credited to the allowance.
32
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NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The allowance for loan losses is maintained at a level considered adequate to provide for losses that can
be reasonably anticipated. Management’s periodic evaluation of the adequacy of the allowance is based on
the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the
loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective
as it requires material estimates that may be susceptible to significant revision as more information
becomes available.
The allowance consists of specific and general components. The specific component relates to loans that are
classified as substandard. For such loans that are also classified as impaired, an allowance is established when
the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the
carrying value of that loan. The general component covers non-classified loans and is based on historical loss
experience adjusted for qualitative factors.
A loan is considered impaired when, based on current information and events, it is probable that the Company
will be unable to collect the scheduled payments of principal or interest when due according to the contractual
terms of the loan agreement. Factors considered by management in determining impairment include payment
status, collateral value and the probability of collecting scheduled principal and interest payments when due.
Loans that experience insignificant payment delays and payment shortfalls generally are not classified as
impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case
basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the
length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the
shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for
commercial and construction loans by either the present value of expected future cash flows discounted at the
loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is
collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the
Company does not separately identify individual consumer and residential real estate loans for impairment
disclosures, unless such loans were acquired with impairment or are the subject of a restructuring agreement.
Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation
Years
expense is calculated principally on the straight-line method over the respective assets estimated useful lives
as follows:
Buildings and improvements
Furniture and equipment
Transfers of Financial Assets
10 - 40
3 - 10
Transfers of financial assets, including loan and loan participation sales, are accounted for as sales, when
control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when
(1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that
constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the
Company does not maintain effective control over the transferred assets through an agreement to repurchase
them before their maturity or the ability to unilaterally cause the holder to return specific assets.
34
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NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Foreclosed Real Estate
Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded
at fair value less cost to sell at the date of foreclosure establishing a new cost basis. After foreclosure, valuations
are periodically performed by management and the real estate is carried at the lower of its carrying amount or
fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are
included in other expenses.
Bank Owned Life Insurance
The Company invests in bank owned life insurance (BOLI) as a source of funding for employee benefit
expenses. BOLI involves the purchasing of life insurance by the Bank on a select group of employees.
The Company is the owner and beneficiary of the policies. This life insurance investment is carried at the cash
surrender value of the underlying policies. Income from the increase in cash surrender value of the policies or
from death benefits realized is included in other income on the Consolidated Statements of Income.
Goodwill
In connection with two acquisitions the Company recorded goodwill in the amount of $11.3 million,
representing the excess of amounts paid over the fair value of net assets of the institutions acquired. Goodwill is
tested and deemed impaired when the carrying value of goodwill exceeds its implied fair value. The value of the
goodwill can change in the future. We expect the value of the goodwill to decrease if there is a significant
decrease in the franchise value of the Bank. If an impairment loss is determined in the future, we will reflect the
loss as an expense for the period in which the impairment is determined, leading to a reduction of our net
income for that period by the amount of the impairment loss. No impairment was recognized for the years ended
December 31, 2018 and 2017.
Other Intangible Assets
At December 31, 2018, the Company had other intangible assets of $336,000, which is net of accumulated
amortization of $1,008,000. These intangible assets will continue to be amortized using the sum-of-the-years
digits method of amortization over ten years. At December 31, 2017, the Company had other intangible assets of
$462,000 which was net of accumulated amortization of $883,000. Amortization expense related to other
intangible assets was $126,000 and $150,000 for the years ended December 31, 2018 and 2017, respectively.
As of December 31, 2018, the estimated future amortization expense for the core deposit intangible is as
follows (in thousands):
2019
2020
2021
2022
2023
Thereafter
$
$
101
77
52
38
29
39
336
34
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NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
Deferred income tax assets and liabilities are determined based on the differences between financial statement
carrying amounts and the tax basis of existing assets and liabilities. These differences are measured at the
enacted tax rates that will be in effect when these differences reverse. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than not that some portion of the
deferred tax assets will not be realized. As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes. On December 22, 2017, the President signed the
Tax Cut and Jobs Act (the “Act”) into law. Among other things, the Act reduced the corporate tax rate from a
maximum of 35% to a flat 21% rate effective January 1, 2018. As a result of the reduction in the corporate
income tax rate to 21%, the Company revalued its net deferred tax asset as of December 31, 2017, which resulted
in a $3,060,000 reduction in its value. The reduction in the value of the net deferred tax asset was recorded as
additional income tax expense in the fourth quarter of 2017.
The Company and its subsidiary file a consolidated federal income tax return. The Company recognizes
interest and penalties on income taxes as a component of income tax expense.
The Company analyzes each tax position taken in its tax returns and determines the likelihood that the
position will be realized. Only tax positions that are “more-likely-than-not” to be realized can be recognized in an
entity’s financial statements. For tax positions that do not meet this recognition threshold, an entity will record
an unrecognized tax benefit for the difference between the position taken on the tax return and the amount
recognized in the financial statements. The Company does not have any unrecognized tax benefits at December
31, 2018 or 2017, or during the years then ended. No unrecognized tax benefits are expected to arise within the
next twelve months.
Advertising Costs
Advertising costs are expensed as incurred.
Earnings per Share
Basic earnings per share represents income available to common stockholders divided by the weighted
average number of common shares outstanding during the period less any unvested restricted shares. Diluted
earnings per share reflects additional common shares that would have been outstanding if dilutive potential
common shares had been issued, as well as any adjustment to income that would result from the assumed
issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options
and are determined using the treasury stock method. Treasury shares are not deemed outstanding for earnings
per share calculations.
Employee Benefit Plans
7
3
The Company has a defined contributory profit-sharing plan which includes provisions of a 401(k) plan.
The Company’s contributions are expensed as the cost is incurred.
The Company has several supplemental executive retirement plans. To fund the benefits under these plans,
the Company is the owner of single premium life insurance policies on the participants.
36
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NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company provides pension benefits to eligible employees. The Company’s funding policy is to contribute
at least the minimum required contributions annually.
Stock Option Plans
The Company recognizes the value of share-based payment transactions as compensation costs in the financial
statements over the period that an employee provides service in exchange for the award. The fair value of the
share-based payments for stock options is estimated using the Black-Scholes option-pricing model. The Company
used the modified-prospective transition method to record compensation expense. Under the modified-
prospective method, companies are required to record compensation cost for new and modified awards over the
related vesting period of such awards and record compensation cost prospectively for the unvested portion, at
the date of adoption, of previously issued and outstanding awards over the remaining vesting period of such
awards. No change to prior periods presented is permitted under the modified-prospective method.
Restricted Stock
The Company recognizes compensation cost related to restricted stock based on the market price of the stock
at the grant date over the vesting period. The product of the number of shares granted and the grant date market
price of the Company’s common stock determines the fair value of restricted stock under the Company’s 2014
Equity Incentive Plan. The Company recognizes compensation expense for the fair value of the restricted stock
on a straight-line basis over the requisite service period for the entire award.
Cash Flow Information
For the purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from
banks, interest-bearing deposits with banks and federal funds sold.
Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Company has entered into off-balance sheet financial instruments
consisting of commitments to extend credit, letters of credit and commitments to sell loans. Such financial
instruments are recorded on the balance sheets when they become receivable or payable.
Trust Assets
Assets held by the Company in a fiduciary capacity for customers are not included in the financial statements
since such items are not assets of the Company. Trust income is reported on the accrual method.
Treasury Stock
Common shares repurchased are recorded as treasury stock at cost.
Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net
income. Certain changes in assets and liabilities, such as unrealized gains and losses on available for sale
securities and defined benefit pension obligations, are reported as a separate component of the equity section of
the balance sheet. Such items, along with net income, are components of comprehensive income as presented in
the Consolidated Statement of Comprehensive Income.
36
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NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Segment Reporting
The Company acts as an independent community financial services provider and offers traditional banking
related financial services to individual, business and government customers. Through its Community Office and
automated teller machine network, the Company offers a full array of commercial and retail financial services,
including the taking of time, savings and demand deposits; the making of commercial, consumer and mortgage
loans; and the providing of safe deposit services. The Company also performs personal, corporate, pension and
fiduciary services through its Trust Department.
Management does not separately allocate expenses, including the cost of funding loan demand, between the
commercial, retail, mortgage banking and trust operations of the Company. As such, discrete information is not
available and segment reporting would not be meaningful.
Reclassification of Comparative Amounts
Certain comparative amounts for the prior year have been reclassified to conform to current-year
classifications. Such reclassifications had no material effect on net income or stockholders’ equity.
New and Recently Adopted Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU 2014-09,
(a new revenue
recognition standard). The Update’s core principle is that a company will recognize revenue to depict the transfer
of goods or services to customers in an amount that reflects the consideration to which the entity expects to be
entitled in exchange for those goods or services. In addition, this Update specifies the accounting for certain costs
to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. This
Update is effective for annual reporting periods beginning after December 15, 2016, including interim periods
within that reporting period. Upon adoption on January 1, 2018, we have included the related new disclosure
requirements in Note 1.
Financial Instruments – Overall
In January 2016, the FASB issued ASU 2016-01,
(Subtopic 825-10): Recognition
and Measurement of Financial Assets and Financial Liabilities. This Update applies to all entities that hold
financial assets or owe financial liabilities and is intended to provide more useful information on the recognition,
measurement, presentation, and disclosure of financial instruments. Among other things, this Update (a)
requires equity investments (except those accounted for under the equity method of accounting or those that
result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net
income; (b) simplifies the impairment assessment of equity investments without readily determinable fair values
by requiring a qualitative assessment to identify impairment; (c) eliminates the requirement to disclose the fair
value of financial instruments measured at amortized cost for entities that are not public business entities; (d)
eliminates the requirement for public business entities to disclose the method(s) and significant assumptions
used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized
cost on the balance sheet; (e) requires public business entities to use the exit price notion when measuring the
fair value of financial instruments for disclosure purposes; (f) requires separate presentation of financial assets
and financial liabilities by measurement category and form of financial asset (that is, securities or loans and
receivables) on the balance sheet or the accompanying notes to the financial statements; and (g) clarifies that an
38
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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale
securities in combination with the entity’s other deferred tax assets. Upon adoption on January 1, 2018, we have
included the related new disclosure requirements in Note 14.
New Accounting Pronouncements Not Yet Adopted
Leases
In February 2016, the FASB issued ASU 2016-02,
(Topic 842). The standard requires lessees to
recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the
statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset
representing its right to use the underlying asset for the lease term. A short-term lease is defined as one in which
(a) the lease term is 12 months or less and (b) there is not an option to purchase the underlying asset that the
lessee is reasonably certain to exercise. For short-term leases, lessees may elect to recognize lease payments
over the lease term on a straight-line basis. For public business entities, the amendments in this Update are
effective for fiscal years beginning after December 15, 2018, and interim periods within those years. For all other
entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and for
interim periods within fiscal years beginning after December 15, 2020. The amendments should be applied at
the beginning of the earliest period presented using a modified retrospective approach with earlier application
permitted as of the beginning of an interim or annual reporting period. The Company is currently assessing the
practical expedients it may elect at adoption, but does not anticipate the amendments will have a significant
impact on the financial statements. Based on the Company’s preliminary analysis of its current portfolio, the
impact to the Company’s balance sheet is estimated to result in less than a one percent increase in assets and
liabilities. The Company also anticipates additional disclosures will be provided at adoption.
Financial Instruments - Credit Losses: Measurement of Credit Losses
on Financial Instruments
In June 2016, the FASB issued ASU 2016-13,
, which changes the impairment model for most financial assets. This Update is intended
to improve financial reporting by requiring timelier recording of credit losses on loans and other financial
instruments held by financial institutions and other organizations. The underlying premise of the Update is that
financial assets measured at amortized cost should be presented at the net amount expected to be collected,
through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit
losses should reflect management’s current estimate of credit losses that are expected to occur over the
remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for
newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that
have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after
December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December
15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect
adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is
adopted. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of
the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the
magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated
financial statements.
Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued ASU 2017-04,
. To simplify the
subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. In
computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine
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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and
liabilities) following the procedure that would be required in determining the fair value of assets acquired and
liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should
perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with
its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying
amount exceeds the reporting units fair value; however, the loss recognized should not exceed the total
amount of goodwill allocated to that reporting unit. A public business entity that is a U.S. Securities and
Exchange Commission (SEC) filer should adopt the amendments in this Update for its annual or any interim
goodwill impairment tests in fiscal years beginning after December 15, 2019. A public business entity that is
not an SEC filer should adopt the amendments in this Update for its annual or any interim goodwill
impairment tests in fiscal years beginning after December 15, 2020. All other entities, including not-for-profit
entities that are adopting the amendments in this Update, should do so for their annual or any interim
goodwill impairment tests in fiscal years beginning after December 15, 2021. This Update is not expected to
have a significant impact on the Company’s financial statements.
Receivables – Nonrefundable Fees and Other Costs
In March 2017, the FASB issued ASU 2017-08,
(Subtopic 310-
20). The amendments in this Update shorten the amortization period for certain callable debt securities held at a
premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The
amendments do not require an accounting change for securities held at a discount; the discount continues to be
amortized to maturity. For public business entities, the amendments in this Update are effective for fiscal years,
and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the
amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal
years beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period.
If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the
beginning of the fiscal year that includes that interim period. An entity should apply the amendments in this
Update on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as
of the beginning of the period of adoption. Additionally, in the period of adoption, an entity should provide
disclosures about a change in accounting principle. The Company is currently evaluating the impact the adoption
of the standard will have on the Company’s financial position or results of operations.
Leases (Topic 842)
In January 2018, the FASB issued ASU 2018-01,
, which provides an optional transition
practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously
accounted for as leases under the current lease guidance in Topic 840. An entity that elects this practical
expedient should evaluate new or modified land easements under Topic 842 beginning at the date the entity
adopts Topic 842; otherwise, an entity should evaluate all existing or expired land easements in connection with
the adoption of the new lease requirements in Topic 842 to assess whether they meet the definition of a lease.
The effective date and transition requirements for the amendments are the same as the effective date and
transition requirements in ASU 2016-02. The Company is currently evaluating the impact the adoption of the
standard will have on the Company’s financial position or results of operations.
Investments – Debt Securities
Regulated Operations
ASU 2018-04,
SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC Release No. 33-9273, ASU 2018-04
supersedes various SEC paragraphs and adds an SEC paragraph pursuant to the issuance of Staff Accounting
Bulletin No. 117.
(Topic 320) and
(Topic 980) - Amendments to
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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Codification Improvements to Topic 942
Financial Services –
Depository and Lending
In May 2018, the FASB issued ASU 2018-06,
, which supersedes outdated guidance related to the Office of the Comptroller of the
Accounting for Net Deferred Tax Charges
,
Currency (OCC)’s Banking Circular 202,
guidance has been rescinded by the OCC and no longer is relevant.
Compensation – Stock Compensation
(Circular 202), because that
In June 2018, the FASB issued ASU 2018-07,
(Topic 718), which simplified
the accounting for nonemployee share-based payment transactions. The amendments in this update expand the
scope of Topic 718 to include share-based payment transactions for acquiring goods and services from
nonemployees. The amendments in this Update improve the following areas of nonemployee share-based
payment accounting: (a) the overall measurement objective, (b) the measurement date, (c) awards with
performance conditions, (d) classification reassessment of certain equity-classified awards, (e) calculated value
(nonpublic entities only), and (f) intrinsic value (nonpublic entities only). The amendments in this Update are
effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods
within that fiscal year. For all other entities, the amendments are effective for fiscal years beginning after
December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.
Codification Improvements
In July 2018, the FASB issued ASU 2018-09,
, which represents changes to clarify,
correct errors in, or make minor improvements to the Codification. The amendments make the Codification
easier to understand and easier to apply by eliminating inconsistencies and providing clarifications. The
transition and effective date guidance is based on the facts and circumstances of each amendment. Some of the
amendments do not require transition guidance and will be effective upon issuance of this ASU. However, many
of the amendments in this ASU do have transition guidance with effective dates for annual periods beginning
after December 15, 2018, for public business entities. This Update is not expected to have a significant impact on
the Company’s financial statements.
Codification Improvements to Topic 842, Leases
In July 2018, the FASB issued ASU 2018-10,
, represents changes
to clarify, correct errors in, or make minor improvements to the Codification. The amendments in this ASU affect
the amendments in ASU 2016-02, which are not yet effective, but for which early adoption upon issuance is
permitted. For entities that early adopted Topic 842, the amendments are effective upon issuance of this ASU,
and the transition requirements are the same as those in Topic 842. For entities that have not adopted Topic 842,
the effective date and transition requirements will be the same as the effective date and transition requirements
in Topic 842. The Company is currently evaluating the impact the adoption of the standard will have on the
Company’s financial position or results of operations.
Leases
In July 2018, the FASB issued ASU 2018-11,
(Topic 842): Targeted Improvements. This Update provides
another transition method which allows entities to initially apply ASC 842 at the adoption date and recognize a
cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Entities that
elect this approach should report comparative periods in accordance with ASC 840,
Update provides a practical expedient under which lessors may elect, by class of underlying assets, to not
separate nonlease components from the associated lease component, similar to the expedient provided for
lessees. However, the lessor practical expedient is limited to circumstances in which the nonlease component or
components otherwise would be accounted for under the new revenue guidance and both (a) the timing and
pattern of transfer are the same for the nonlease component(s) and associated lease component and (b) the lease
component, if accounted for separately, would be classified as an operating lease. If the nonlease component or
. In addition, this
Leases
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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue from Contracts with
components associated with the lease component are the predominant component of the combined component,
Customers
an entity should account for the combined component in accordance with ASC 606,
. Otherwise, the entity should account for the combined component as an operating lease in
accordance with ASC 842. If a lessor elects the practical expedient, certain disclosures are required. This Update
is effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods
within those fiscal years, with early adoption permitted. For all other entities, the amendments are effective for
fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December
15, 2020. This Update is not expected to have a significant impact on the Company’s financial statements.
Fair Value Measurement
(Topic 820): Disclosure Framework –
Changes the Disclosure Requirements for Fair Value Measurements
In August 2018, the FASB issued ASU 2018-13,
. The Update removes the requirement to
disclose the amount of and reasons for transfers between Level I and Level II of the fair value hierarchy; the
policy for timing of transfers between levels; and the valuation processes for Level III fair value measurements.
The Update requires disclosure of changes in unrealized gains and losses for the period included in other
comprehensive income (loss) for recurring Level III fair value measurements held at the end of the reporting
period and the range and weighted average of significant unobservable inputs used to develop Level III fair value
measurements. This Update is effective for all entities for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2019. This Update is not expected to have a significant impact on the
Company’s financial statements.
Compensation – Retirement Benefits
(Topic 715-20)
In August 2018, the FASB issued ASU 2018-14,
. This Update
amends ASC 715 to add, remove and clarify disclosure requirements related to defined benefit pension and other
postretirement plans. The Update eliminates the requirement to disclose the amounts in accumulated other
comprehensive income expected to be recognized as part of net periodic benefit cost over the next year. The
Update also removes the disclosure requirements for the effects of a one-percentage-point change on the
assumed health care costs and the effect of this change in rates on service cost, interest cost and the benefit
obligation for postretirement health care benefits. This Update is effective for public business entities for fiscal
years ending after December 15, 2020, and must be applied on a retrospective basis. For all other entities, this
Update is effective for fiscal years ending after December 15, 2021. This Update is not expected to have a
significant impact on the Company’s financial statements.
Codification Improvements to Topic 326, Financial
Instruments - Credit Losses
In November, 2018, the FASB issued ASU 2018-19,
, which amended the effective date of ASU 2016-13 for entities other than public
business entities (PBEs), by requiring non-PBEs to adopt the standard for fiscal years beginning after December
15, 2021, including interim periods within those fiscal years. Therefore, the revised effective dates of ASU 2016-
13 for PBEs that are SEC filers will be fiscal years beginning after December 15, 2019, including interim periods
within those years, PBEs other than SEC filers will be for fiscal years beginning after December 15, 2020,
including interim periods within those years, and all other entities (non-PBEs) will be for fiscal years beginning
after December 15, 2021, including interim periods within those years. The ASU also clarifies that receivables
arising from operating leases are not within the scope of Subtopic 326-20. Rather, impairment of receivables
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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Leases
. The effective date
arising from operating leases should be accounted for in accordance with Topic 842,
and transition requirements for ASU 2018-19 are the same as those in ASU 2016-13, as amended by ASU 2018-
19. This Update is not expected to have a significant impact on the Company’s financial statements.
Leases (Topic 842)
In December 2018, the FASB issued ASU 2018-20,
Leases
, which addressed implementation
. Specifically addressed in this Update were
questions arising from stakeholders in regard to ASU 2016-02,
issues related to 1) sales taxes and other similar taxes collected from lessees, 2) certain lessor costs, and 3)
recognition of variable payments for contracts with lease and nonlease components. The amendments in this
Update affect the amendments in Update 2016-02, which are not yet effective but can be early adopted. The
effective date and transition requirements for the amendments in this Update are the same as the effective date
and transition requirements in Update 2016-02 (for example, January 1, 2019, for calendar-year-end public
business entities). The Company is currently evaluating the impact the adoption of the standard will have on the
Company’s financial position or results of operations.
NOTE 3 - SECURITIES
The amortized cost, gross unrealized gains and losses, and fair value of securities were as follows:
December 31, 2018
Gross
Gross
Unrealized
Unrealized
Losses
Gains
Amortized
Cost
Fair
Value
AVAILABLE FOR SALE:
States and political subdivisions
Corporate obligations
Mortgage-backed securities-
government sponsored entities
Total debt securities
AVAILABLE FOR SALE:
U.S. Treasury securities
States and political subdivisions
Corporate obligations
Mortgage-backed securities-
government sponsored entities
Total debt securities
(In Thousands)
$ 99,218
8,896
$
385
-
$
(1,990)
(256)
$ 97,613
8,640
142,197
25
(5,198)
137,024
$ 250,311
$
410
$
(7,444)
$ 243,277
Amortized
Cost
December 31, 2017
Gross
Gross
Unrealized
Unrealized
Losses
Gains
(In Thousands)
Fair
Value
$
2,001
120,000
10,068
$
-
1,535
16
$
(3)
(1,057)
(95)
$
1,998
120,478
9,989
152,901
284,970
$
17
1,568
$
(4,262)
(5,417)
148,656
$ 281,121
$
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NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
NOTE 3 - SECURITIES (CONTINUED)
The following tables show the Company’s investments’ gross unrealized losses and fair value aggregated by
security type and length of time that individual securities have been in a continuous unrealized loss position
(in thousands):
December 31, 2018
12 Months or More
Total
Less than 12 Months
States and political subdivisions
Corporate obligations
Mortgage-backed securities-
government sponsored entities
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
$ 19,140 $
2,045
(390) $ 56,740
6,595
(21)
$
(1,600) $
(235)
75,880
8,640
8,444
$ 29,629 $
(22)
122,950
(433) $ 186,285
(5,176)
131,394
(7,011) $ 215,914
$
$
$
(1,990)
(256)
(5,198)
(7,444)
Less than 12 Months
December 31, 2017
12 Months or More
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
U.S. Treasury securities
States and political subdivisions
Corporate obligations
Mortgage-backed securities-
government sponsored entities
$
- $
- $
17,310
-
(228)
-
1,998
44,948
6,859
$
(3) $
(829)
(95)
$
1,998
62,258
6,859
(3)
(1,057)
(95)
22,250
$ 39,560 $
(320)
125,846
(548) $ 179,651
(3,942)
(4,869) $
148,096
219,211
$
$
(4,262)
(5,417)
The Company has 43 debt securities in the less than twelve month category and 188 debt securities in the
twelve months or more category as of December 31, 2018. In management’s opinion, the unrealized losses on
securities reflect changes in interest rates subsequent to the acquisition of specific securities. No other-than-
temporary-impairment charges were recorded in 2018. Management believes that all other unrealized losses
represent temporary impairment of the securities, and it is more likely than not that it will not have to sell the
securities before recovery of their cost basis.
The amortized cost and fair value of debt securities as of December 31, 2018 by contractual maturity, are
shown below. Expected maturities may differ from contractual maturities because borrowers may have the
Fair
right to prepay obligations with or without call or prepayment penalties.
Value
Amortized
Cost
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Mortgage-backed securities -
government sponsored entities
(In Thousands)
$
$
1,666
22,532
44,638
39,278
108,114
1,671
22,130
43,454
38,998
106,253
142,197
$ 250,311
137,024
$ 243,277
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NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
NOTE 3 - SECURITIES (CONTINUED)
Gross realized gains and gross realized losses on sales of securities available for sale were $213,000 and $0,
respectively, in 2018, compared to $354,000 and $6,000, respectively, in 2017. The proceeds from the sales of
securities totaled $17,745,000 and $15,612,000 for the years ended December 31, 2018 and 2017, respectively.
Securities with a carrying value of $193,918,000 and $213,065,000 at December 31, 2018 and 2017,
respectively, were pledged to secure public deposits, securities sold under agreements to repurchase and for
other purposes as required or permitted by law.
NOTE 4 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
Set forth below is selected data relating to the composition of the loan portfolio:
(dollars in thousands)
Types of loans
December 31, 2018
December 31, 2017
Real Estate:
Residential
Commercial
Construction
Commercial, financial and agricultural
Consumer loans to individuals
Total loans
Deferred fees, net
Total loans receivable
Allowance for loan losses
Net loans receivable
$ 235,523
27.7%
374,790
44.1
17,445
2.0
110,542
13.0
112,002
13.2
850,302
100.0%
(120)
850,182
(8,452)
$ 841,730
$
235,759
30.8%
342,934
44.9
17,228
2.3
97,461
12.7
70,953
9.3
764,335
100.0%
(243)
764,092
(7,634)
$
756,458
Changes in the accretable yield for purchased credit-impaired loans were as follows for the twelve months
ended December 31:
(In thousands)
Balance at beginning of period
Additions
Accretion
Reclassification and other
Balance at end of period
2018
2017
$
$
108
-
(56)
(23)
29
$
$
208
-
(73)
(27)
108
Outstanding Balance
Carrying Amount
44
45
The following table presents additional information regarding loans acquired and accounted for in
accordance with ASC 310-30 (in thousands):
December 31, 2018 December 31, 2017
$
$
1,055
886
$
$
1,444
1,174
NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
NOTE 4 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
There were no material increases or decreases in the expected cash flows of these loans since the
acquisition date. There has been no allowance for loan losses recorded for acquired loans with specific
evidence of deterioration in credit quality. As of December 31, 2018, for loans that were acquired prior to
2018 with or without specific evidence of deterioration in credit quality, adjustments to the allowance for loan
losses have been accounted for through the allowance for loan loss adequacy calculation.
The Company maintains a loan review system, which allows for a periodic review of our loan portfolio and
the early identification of potential impaired loans. The system takes into consideration, among other things,
delinquency status, size of loans, type and market value of collateral and financial condition of the borrowers.
Specific loan loss allowances are established for identified losses based on a review of such information.
A loan evaluated for impairment is considered to be impaired when, based on current information and events,
it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan
agreement. All loans identified as impaired are evaluated independently. The Company does not aggregate
such loans for evaluation purposes. Impairment is measured on a loan-by-loan basis for commercial and
construction loans by the present value of expected future cash flows discounted at the loan’s effective interest
rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral-dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly,
the Company does not separately identify individual consumer and residential mortgage loans for impairment
disclosures, unless such loans are part of a larger relationship that is impaired, or are classified as a troubled
debt restructuring.
The following tables show the amount of loans in each category that were individually and collectively
evaluated for impairment at the dates indicated:
December 31, 2018
Individually evaluated
for impairment
Loans acquired with
deteriorated credit quality
Collectively evaluated
for impairment
Total Loans
December 31, 2017
Individually evaluated
for impairment
Loans acquired with
deteriorated credit quality
Collectively evaluated
for impairment
Real Estate Loans
Residential Commercial Construction
$
(In thousands)
$
1,319 $
- $
-
Commercial Consumer
Loans
-
$
Loans
-
$
Total
1,319
630
256
-
-
-
886
234,893
373,215
17,445
110,542
112,002
848,097
$ 235,523 $ 374,790 $ 17,445
$ 110,542
$ 112,002
$ 850,302
Real Estate Loans
Residential Commercial Construction
Commercial Consumer
Loans
Loans
Total
(In thousands)
$
23 $
1,224 $
-
$
-
$
-
$
1,247
833
341
-
-
-
1,174
234,903
341,369
17,228
97,461
70,953
761,914
Total Loans
$ 235,759 $ 342,934 $
17,228
$
97,461
$
70,953
$
764,335
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NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
NOTE 4 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
The following table includes the recorded investment and unpaid principal balances for impaired loans with
the associated allowance amount, if applicable.
December 31, 2018
With no related allowance recorded:
Real Estate Loans
Total:
Commercial
Subtotal
Real Estate Loans
Commercial
Total Impaired Loans
December 31, 2017
With no related allowance recorded:
Real Estate Loans
Residential
Total:
Commercial
Subtotal
Real Estate Loans
Residential
Commercial
Total Impaired Loans
Recorded
Investment
1,319
1,319
Unpaid
Principal
Balance
(In thousands)
1,747
$
1,747
$
1,319
1,319
$
1,747
1,747
$
Associated
Allowance
-
-
-
-
Recorded
Investment
Unpaid
Principal
Balance
(In thousands)
Associated
Allowance
23
1,224
1,247
23
1,224
1,247
$
$
28
1,496
1,524
28
1,496
1,524
$
$
-
-
-
-
-
-
$
$
$
$
The following information for impaired loans is presented for the years ended December 31, 2018 and 2017:
2017
2018
Average Recorded
Investment
2018
Interest Income
Recognized
2017
Total:
Real Estate Loans
Residential
Commercial
Total Loans
$
$
-
1,220
1,220
(In thousands)
$
$
$
$
23
1,209
1,232
-
67
67
$
$
-
56
56
Troubled debt restructured loans are those loans whose terms have been renegotiated to provide a
reduction or deferral of principal or interest as a result of financial difficulties experienced by the borrower,
who could not obtain comparable terms from alternate financing sources. As of December 31, 2018, troubled
debt restructured loans totaled $1.1 million and resulted in specific reserves of $0. During 2018, there were
no new loan relationships identified as troubled debt restructurings, while one loan identified as a troubled
debt restructuring with a balance of $23,000 as of December 31, 2017 was paid in full during 2018.
During 2018, there were no charge-offs on loans classified as troubled debt restructurings.
46
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NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
NOTE 4 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
As of December 31, 2017, troubled debt restructured loans totaled $1.1 million and resulted in specific
reserves of $0. During 2017, there were no new loan relationships identified as troubled debt restructurings,
while one loan identified as a troubled debt restructuring with a balance of $322,000 as of December 31, 2016
was paid in full during 2017. During 2017, the Company recognized charge-offs totaling $55,000 on loans
classified as troubled debt restructurings.
Foreclosed assets acquired in settlement of loans are carried at fair value less estimated costs to sell and are
included in foreclosed real estate owned on the Consolidated Balance Sheets. As of December 31, 2018 and
2017, foreclosed real estate owned totaled $1,115,000 and $1,661,000, respectively. As of December 31, 2018,
included within foreclosed real estate owned is $36,000 of consumer residential mortgages that were
foreclosed on or received via a deed in lieu transaction prior to year-end. As of December 31, 2018, the
Company has initiated formal foreclosure proceedings on three consumer residential mortgage loans with an
outstanding balance of $298,000.
Management uses an eight point internal risk rating system to monitor the credit quality of the overall
loan portfolio. The first four categories are considered not criticized, and are aggregated as “Pass” rated.
The criticized rating categories utilized by management generally follow bank regulatory definitions. The
Special Mention category includes assets that are currently protected but are potentially weak, resulting in an
undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the
Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a
distinct possibility that some loss will be sustained if the weaknesses are not corrected. Loans greater than 90
days past due are considered Substandard unless full payment is expected. Any portion of a loan that has been
charged off is placed in the Loss category.
To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to
repay a loan as agreed, the Company has a structured loan rating process with several layers of internal and
external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories
unless a specific action, such as nonperformance, repossession, or death occurs to raise awareness of a
possible credit event. The Company’s Loan Review Department is responsible for the timely and accurate risk
rating of the loans on an ongoing basis. Every credit which must be approved by Loan Committee or the Board
of Directors is assigned a risk rating at time of consideration. Loan Review also annually reviews relationships
of $1,500,000 and over to assign or re-affirm risk ratings. Loans in the Substandard categories that are
collectively evaluated for impairment are given separate consideration in the determination of the allowance.
48
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NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
NOTE 4 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the
criticized categories of Special Mention, Substandard, Doubtful and Loss within the internal risk rating system
as of December 31, 2018 and December 31, 2017 (in thousands):
December 31, 2018
Commercial real estate loans
Commercial
Total
Special
Mention
Pass
$ 360,838 $
109,966
$ 470,804 $
7,918 $
82
8,000 $
Substandard
6,034
494
6,528
Doubtful
-
-
-
$
$
$
$
Loss
-
-
-
Total
$ 374,790
110,542
$ 485,332
December 31, 2017
Pass
Special
Mention
Substandard
Doubtful
Loss
Total
Commercial real estate loans
Commercial
Total
$ 329,617 $
97,389
$ 427,006 $
9,680 $
16
9,696 $
3,637
56
3,693
$
$
-
-
-
$
$
-
-
-
$
$
342,934
97,461
440,395
For residential real estate loans, construction loans and consumer loans, the Company evaluates credit
quality based on the performance of the individual credits. Nonperforming loans include loans that have been
placed on nonaccrual status and loans remaining in accrual status on which the contractual payment of
principal and interest has become 90 days past due.
The following table presents the recorded investment in the loan classes based on payment activity as of
December 31, 2018 and December 31, 2017 (in thousands):
December 31, 2018
Residential real estate loans
Construction
Consumer loans to individuals
Total
December 31, 2017
Residential real estate loans
Construction
Consumer loans to individuals
Total
48
49
$ 234,725
$
Performing Nonperforming
17,445
112,002
$ 364,172
798
-
-
798
$ 235,523
Total
17,445
112,002
$ 364,970
$
Performing Nonperforming
$ 233,966
$
17,228
70,953
$ 322,147
1,793
-
-
1,793
$
$
$
Total
235,759
17,228
70,953
323,940
NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
NOTE 4 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
Management further monitors the performance and credit quality of the loan portfolio by analyzing the age
of the portfolio as determined by the length of time a recorded payment is past due. The following table
presents the classes of the loan portfolio summarized by the aging categories of performing loans and
nonaccrual loans as of December 31, 2018 and December 31, 2017 (in thousands):
December 31, 2018
Current
$ 234,201
372,617
17,445
110,191
111,796
$ 846,250
Real Estate loans
Residential
Commercial
Construction
Commercial loans
Consumer loans
Total
December 31, 2017
Current
Real Estate loans
Residential
Commercial
Construction
Commercial loans
Consumer loans
Total
$ 233,291
341,602
17,228
97,424
70,869
$ 760,414
$
$
Greater than
90 Days Past
31-60 Days 61-90 Days Due and still
Past Due
151
788
-
31
35
$ 1,005
Past Due
373
1,043
-
320
171
1,907
accruing
-
-
-
-
-
-
$
$
$
Non-
Total Past
Due and
Accrual Non-Accrual
$
$
798
342
-
-
-
1,140
$
$
1,322
2,173
-
351
206
4,052
Greater than
90 Days Past
31-60 Days 61-90 Days Due and still
Past Due
Past Due
accruing
Non-
Total Past
Due and
Accrual Non-Accrual
$
$
594
646
-
10
60
1,310
$
$
81
-
-
27
24
132
$
$
87
409
-
-
-
496
$
$
1,706
277
-
-
-
1,983
$
$
2,468
1,332
-
37
84
3,921
Total
Loans
235,523
374,790
17,445
110,542
112,002
850,302
Total
Loans
235,759
342,934
17,228
97,461
70,953
764,335
$
$
$
$
50
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NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
NOTE 4 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
The following table presents the allowance for loan losses by the classes of the loan portfolio:
(In thousands)
Beginning balance,
December 31, 2017
Charge Offs
Recoveries
Provision for loan losses
Ending balance,
December 31, 2018
Ending balance individually
evaluated for impairment
Ending balance collectively
evaluated for impairment
(In thousands)
Beginning balance,
December 31, 2016
Charge Offs
Recoveries
Provision for loan losses
Ending balance,
December 31, 2017
Ending balance individually
evaluated for impairment
Ending balance collectively
evaluated for impairment
Residential Commercial
Real Estate Real Estate Construction Commercial
$
$
$
1,272 $
(197)
9
244
5,265 $
(283)
33
440
90
-
-
3
463
(246)
8
487
$
Consumer
544
(263)
32
551
Total
7,634
(989)
82
1,725
$
1,328 $
5,455 $
93
$
712
$
864
$
8,452
$
- $
- $
-
$
-
$
-
$
-
$
1,328 $
5,455 $
93
$
712
$
864
$
8,452
Residential Commercial
Real Estate Real Estate Construction Commercial
Consumer
Total
$
1,092 $
(83)
6
257
4,623 $
(902)
159
1,385
$
78
(28)
-
40
$
307
-
-
156
$
363
(207)
26
362
6,463
(1,220)
191
2,200
$
1,272 $
5,265 $
90
$
463
$
544
$
7,634
$
- $
- $
-
$
-
$
-
$
-
$
1,272 $
5,265 $
90
$
463
$
544
$
7,634
The recorded investment in impaired loans, not requiring an allowance for loan losses was $1,319,000 (net of
charge-offs against the allowance for loan losses of $428,000) and $1,247,000 (net of charge-offs against the
allowance for loan losses of $277,000) at December 31, 2018 and 2017, respectively. The recorded investment in
impaired loans requiring an allowance for loan losses was $0 at December 31, 2018 and 2017, respectively. The
specific reserve related to impaired loans was $0 for 2018 and 2017. For the years ended December 31, 2018
and 2017, the average recorded investment in these impaired loans was $1,220,000, and $1,232,000,
respectively, and the interest income recognized on these impaired loans was $67,000 and $56,000, respectively.
During the period ended December 31, 2018, the allowance for loan losses increased from $7,634,000 to
$8,452,000. This $818,000 increase in the required allowance was due primarily to an $86.1 million increase
in loan balances and an additional qualitative factor to allocate reserves for potential risk in large balance
loans. This increase was partially offset by a reduction in the historical loss factor from 0.41% at December
31, 2017 to 0.26% on December 31, 2018.
50
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NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
NOTE 4 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
During the period ended December 31, 2017, the allowance for commercial real estate loans increased from
$4,623,000 to $5,265,000. This $642,000 increase in the required allowance was due primarily to a
$22,747,000 increase in loan balances and an increase in the amount of reserve required for classified loans.
This increase was partially offset by a reduction in the historical loss factor from 0.80% at December 31, 2016
to 0.74% on December 31, 2017.
Interest income that would have been recorded on loans accounted for on a non-accrual basis under the
original terms of the loans was $98,000 and $163,000 for 2018 and 2017, respectively.
As of December 31, 2018 and 2017, the Company considered its concentration of credit risk to be
acceptable. As of December 31, 2018, the highest concentrations are in commercial rentals and the hospitality
lodging industry, with loans outstanding of $71.8 million, or 68.9% of bank capital, to commercial rentals, and
$59.7 million, or 57.3% of bank capital to the hospitality lodging industry. Charge-offs on loans within these
concentrations were $0 and $762,000 for the years ended December 31, 2018 and 2017, respectively.
During 2018, the Company sold residential mortgage loans totaling $752,000. During 2017, the Company
did not sell any residential mortgage loans. Gross realized gains and gross realized losses on sales of
residential mortgage loans were $15,000 and $0, respectively, in 2018 and $0 and $0, respectively, in 2017.
The proceeds from the sales of residential mortgage loans totaled $767,000 and $0 for the years ended
December 31, 2018 and 2017, respectively. As of December 31, 2018 and 2017, the outstanding value of loans
serviced for others totaled $26.8 million and $29.0 million, respectively.
NOTE 5 - PREMISES AND EQUIPMENT
Components of premises and equipment at December 31 are as follows:
Land and improvements
Buildings and improvements
Furniture and equipment
Accumulated depreciation
2018
(In Thousands)
2017
$
$
$
2,832
17,788
7,171
27,791
(13,945)
13,846
$
2,771
17,613
6,636
27,020
(13,156)
13,864
Depreciation expense totaled $895,000 and $922,000 for the years ended December 31, 2018 and
2017, respectively.
Certain facilities are leased under various operating leases. Rental expense for these leases was $470,000
and $405,000, respectively, for the years ended December 31, 2018 and 2017. Future minimum rental
commitments under noncancellable leases as of December 31, 2018 were as follows (in thousands):
$
2019
2020
2021
2022
2023
Thereafter
$
454
452
452
452
452
4,202
6,464
52
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NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
NOTE 6 - DEPOSITS
Aggregate time deposits in denominations of more than $250,000 were $112,665,000 and $92,527,000 at
December 31, 2018 and 2017, respectively.
At December 31, 2018, the scheduled maturities of time deposits are as follows (in thousands):
2019
2020
2021
2022
2023
$ 212,786
81,453
17,246
17,374
16,318
$ 345,177
NOTE 7 - BORROWINGS
Short-term borrowings at December 31 consist of the following:
Securities sold under agreements to repurchase
Federal Home Loan Bank short-term borrowings
2018
(In Thousands)
2017
$
$
37,457
15,589
53,046
$
$
24,286
18,244
42,530
The outstanding balances and related information of short-term borrowings are summarized as follows:
2017
Years Ended December 31,
2018
(In Thousands)
41,963
$
Average balance during the year
Average interest rate during the year
Maximum month-end balance during the year
Weighted average interest rate at the end of the year
0.77%
$
53,046
1.27%
$
39,170
0.51%
$
54,286
0.87%
Securities sold under agreements to repurchase generally mature within one day to one year from the
transaction date. Securities with an amortized cost and fair value of $41,587,000 and $40,161,000 at
December 31, 2018 and $27,255,000 and $26,626,000 at December 31, 2017, respectively, were pledged as
collateral for these agreements. The securities underlying the agreements were under the Company’s control.
The collateral pledged for repurchase agreements that are classified as secured borrowings is summarized
As of December 31, 2018
as follows (in thousands):
Remaining Contractual Maturity of the Agreements
Overnight
and
continuous
$ 40,161 $
Up to
30 days
-
$
30-90
days
-
$
Greater
than 90
days
Total
$ 40,161
-
$ 37,457
Repurchase Agreements:
Mortgage-backed securities -
government sponsored entities
Total liability recognized for
repurchase agreements
52
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NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
NOTE 7 - BORROWINGS (CONTINUED)
As of December 31, 2017
Remaining Contractual Maturity of the Agreements
Overnight
and
continuous
Up to
30 days
30-90
days
Greater
than 90
days
$ 26,626 $
-
$
-
$
-
Total
$
$
26,626
24,286
Repurchase Agreements:
Mortgage-backed securities -
government sponsored entities
Total liability recognized for
repurchase agreements
The Company has a line of credit commitment available from the FHLB of Pittsburgh for borrowings of up to
$150,000,000, which renews annually in May. At December 31, 2018, there were $15,589,000 of borrowings
outstanding on this line. There were $18,244,000 of borrowings outstanding on this line of credit at December
31, 2017. The Company has a line of credit commitment available from Atlantic Community Bankers Bank for
$7,000,000, which expires on June 30, 2019. There were no borrowings under this line of credit at December 31,
2018 and 2017. The Company has a line of credit commitment available from PNC Bank for $16,000,000 at
December 31, 2018. There were no borrowings under this line of credit at December 31, 2018 and December 31,
2017. The Company also has a line of credit commitment from Zions Bank for $17,000,000. There were no
borrowings under this line of credit at December 31, 2018 and December 31, 2017.
Other borrowings consisted of the following at December 31, 2018 and 2017:
Amortizing fixed rate borrowing due January 2018 at 0.91%
Amortizing fixed rate borrowing due December 2018 at 1.42%
Amortizing fixed rate borrowing due January 2019 at 1.39%
Fixed rate term borrowing due August 2019 at 1.61%
Amortizing fixed rate borrowing due June 2020 at 1.49%
Amortizing fixed rate borrowing due July 2020 at 2.77%
Amortizing fixed rate borrowing due December 2020 at 1.71%
Amortizing fixed rate borrowing due December 2020 at 3.06%
Amortizing fixed rate borrowing due March 2022 at 1.75%
Amortizing fixed rate borrowing due October 2022 at 1.88%
Amortizing fixed rate borrowing due October 2023 at 3.24%
Amortizing fixed rate borrowing due December 2023 at 3.22%
2018
2017
(In Thousands)
-
-
423
10,000
3,079
7,962
5,000
2,051
2,877
6,200
9,692
5,000
52,284
$
$
$
$
51
823
5,451
10,000
5,093
-
3,051
-
3,730
7,746
-
-
35,945
54
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NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
NOTE 7 - BORROWINGS (CONTINUED)
Contractual maturities and scheduled cash flows of other borrowings at December 31, 2018 are as follows
(in thousands):
$
26,234
13,018
5,581
4,760
2,691
52,284
2019
2020
2021
2022
2023
$
The Bank’s maximum borrowing capacity with the FHLB was $398,936,000 of which $67,873,000 was
outstanding in the form of advances and $45,000,000 was outstanding in the form of letters of credit at
December 31, 2018. Advances from the FHLB are secured by qualifying assets of the Bank.
NOTE 8 - EMPLOYEE BENEFIT PLANS
The Company has a defined contributory profit-sharing plan which includes provisions of a 401(k) plan.
The plan permits employees to make pre-tax contributions up to 15% of the employee’s compensation, not to
exceed the limits set by the Internal Revenue Service. The amount of contributions to the plan, including
matching contributions, is at the discretion of the Board of Directors. All employees over the age of 21
are eligible to participate in the plan and receive Company contributions after one year of employment.
Eligible employees are able to contribute to the Plan at the beginning of the first quarterly period after their
date of employment. Employee contributions vest immediately, and any Company contributions are fully
vested after five years. The Company’s contributions are expensed as the cost is incurred, funded currently,
and amounted to $738,000 and $605,000 for the years ended December 31, 2018 and 2017, respectively.
The Company has several non-qualified supplemental executive retirement plans for the benefit of certain
executive officers and former officers. At December 31, 2018 and 2017, other liabilities include $3,362,000
and $3,360,000 accrued under the Plan. Compensation expense includes approximately $434,000 and
$301,000 relating to the supplemental executive retirement plan for 2018 and 2017, respectively. To fund the
benefits under this plan, the Company is the owner of single premium life insurance policies on participants in
the non-qualified retirement plan. At December 31, 2018 and 2017, the cash value of these policies was
$37,932,000 and $37,060,000, respectively.
The Company provides postretirement benefits in the form of split-dollar life arrangements to employees who
meet the eligibility requirements. The net periodic postretirement benefit expense included in salaries and
employee benefits was $149,000 and $168,000 for the years ended December 31, 2018 and 2017, respectively.
FASB authoritative guidance on accounting for deferred compensation and postretirement benefit aspects of
endorsement split-dollar life insurance arrangements requires the recognition of a liability and related
compensation expense for endorsement split-dollar life insurance that provides a benefit to an employee that
extends to postretirement periods. The life insurance policies purchased for the purpose of providing such
benefits do not effectively settle an entity’s obligation to the employee. Accordingly, the entity must recognize
a liability and related compensation expense during the employee’s active service period based on the future
cost of insurance to be incurred during the employee’s retirement. This expense is included in the SERP plan
54
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NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
NOTE 8 - EMPLOYEE BENEFIT PLANS (CONTINUED)
expense for 2018 discussed above. If the entity has agreed to provide the employee with a death benefit, then
the liability for the future death benefit should be recognized by following the FASB authoritative guidance on
employer’s accounting for postretirement benefits other than pensions. The accumulated postretirement
benefit obligation was $1,291,000 and $1,142,000 at December 31, 2018 and 2017, respectively.
Through its acquisition of Delaware, the Company also has certain director fee deferral and continuation plans.
These plans allowed directors to defer director fees and provide a benefit payment for a period of five to fifteen
years. The Company expensed $6,000 and $9,000 under these plans in 2018 and 2017, respectively.
At December 31, 2018 and 2017, the liability under these plans was $249,000 and $331,000, respectively.
Certain key executives have change in control agreements with the Company. These agreements provide
certain potential benefits in the event of termination of employment following a change in control.
The Company participates in the Pentegra Mulitemployer Defined Benefit Pension Plan (EIN 13-5645888
and Plan # 333) as a result of its acquisition of North Penn. As of December 31, 2018 and 2017, the
Company’s Plan was 91.4% and 89.0% funded, respectively, and total contributions made are not more than
5% of the total contributions to the Plan. The Company’s expense related to the Plan was $46,000 in 2018
and 2017. During the plan years ending December 31, 2018 and 2017, the Company made a contribution of
$46,000 for each year.
As a result of its acquisition of Delaware, the Company is a member of the New York State Bankers
Retirement System. Substantially all full-time employees who were former employees of Delaware are covered
under this defined benefit pension plan (the “Delaware Plan”). The Company’s funding policy is to contribute
at least the minimum required contribution annually. Pension cost is computed using the projected unit credit
actuarial cost method. Effective December 31, 2012, the Delaware Plan was closed to new participants and
accrued benefits were frozen.
The following table sets forth the projected benefit obligation and change in plan assets for the Delaware
Plan at December 31:
(in Thousands of Dollars)
2017
2018
Change in projected benefit obligation:
Projected benefit obligation at beginning of year
Service cost
Interest cost
Actuarial gain (loss)
Benefits paid
Benefit obligation at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Benefits paid
Fair value of assets at end of year
Funded status at end of year
$
$
$
$
(8,465)
(64)
(279)
1,040
582
(7,186)
7,110
(401)
(573)
6,136
(1,050)
$
$
$
$
(8,084)
(68)
(303)
(587)
577
(8,465)
6,702
981
(573)
7,110
(1,355)
56
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NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
NOTE 8 - EMPLOYEE BENEFIT PLANS (CONTINUED)
The Delaware Plan paid $582,000 and $577,000 in benefit payments in 2018 and 2017, respectively.
Estimated benefit payments under the Delaware Plan are expected to be approximately $510,000, $498,000,
$486,000, $487,000 and $472,000 for the next five years. Payments are expected to be approximately
$2,233,000 in total for the five-year period ending December 31, 2028. The Company was not required to
make any contributions to the Delaware Plan in 2018 or 2017. The increase in the projected discount rate
contributed approximately $900,000 to the overall increase in the projected benefit obligation for the year
ended December 31, 2018.
The accumulated benefit obligation for the Delaware Plan was $7,186,000 and $8,465,000 at December 31,
2018 and 2017, respectively.
The following table sets forth the amounts recognized in accumulated other comprehensive income for the
years ended December 31 (in thousands):
2017
Transition asset
Prior service credit
Gain
Total
Net pension cost (income) included the following components (in thousands):
Service cost benefits earned during the period
Interest cost on projected benefit obligation
Actual return on assets
Net amortization and deferral
NET PERIODIC PENSION COST
The weighted average assumptions used to determine the benefit obligation at December 31 are as follows:
2018
4.54%
2017
Discount rate
3.43%
The weighted average assumptions used to determine the net periodic pension cost at December 31 are
as follows:
2017
Discount rate
Expected long-term return on plan assets
Rate of compensation increase
$
$
$
2018
-
-
207
207
2018
64
279
(441)
-
$
$
$
-
-
473
473
2017
68
303
(416)
-
$
(45)
$
(98)
2018
3.43%
6.50%
0.00%
3.90%
6.50%
0.00%
The expected long-term return on plan assets was determined based upon expected returns on individual
asset types included in the asset portfolio.
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NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
NOTE 8 - EMPLOYEE BENEFIT PLANS (CONTINUED)
The Delaware Plan’s weighted-average asset allocations at December 31, by asset category, are as follows:
2017
2018
Cash equivalents
Equity securities
Fixed income securities
Other
4.2%
46.1%
45.8%
3.9%
100.0%
6.4%
50.2%
40.2%
3.2%
100.0%
The Delaware Plan’s overall investment strategy is to achieve a mix of approximately 97 percent of
investments for long-term growth and 3 percent for near-term benefit payments with a wide diversification of
asset types, fund strategies, and fund managers. The target allocation for the Delaware Plan assets is 0 to 20
percent cash equivalents, 40 to 60 percent equity securities, 40 to 60 percent fixed income securities, and 0 to
5 percent other. Cash equivalents consist primarily of government issues and short-term investment funds.
Equity securities primarily include investments in common stock, depository receipts, preferred stock, and
real estate investment trusts. Fixed income securities include corporate bonds, government issues, mortgage-
backed securities, municipals, and other asset backed securities.
The fair value of the Delaware Plan’s assets, by asset category, is as follows:
December 31, 2018
Quoted
Market
Price in
Active
Markets
(Level 1)
Total
Other
Observable Unobservable
Inputs
(Level 2)
Inputs
(Level 3)
(in thousands of dollars)
$
6
$
6
$
-
$
2,475
42
20
608
2,228
156
601
6,136
2,475
42
20
-
-
-
-
2,543
$
$
-
-
-
608
2,228
156
-
2,992
$
$
-
-
-
-
-
-
-
601
601
Cash equivalents:
Cash (including foreign currencies)
Equity securities:
Common stock
Depository receipts
Preferred stock
Fixed income securities:
Corporate bonds
Government issue
Collateralized mortgage obligations
Other
Total
58
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NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
NOTE 8 - EMPLOYEE BENEFIT PLANS (CONTINUED)
December 31, 2017
Quoted
Market
Price in
Active
Markets
(Level 1)
Total
Other
Observable Unobservable
Inputs
(Level 2)
Inputs
(Level 3)
(in thousands of dollars)
$
$
70
19
$
70
-
$
-
19
1,401
35
2,203
31
296
992
6
56
1,746
255
7,110
$
1,401
35
-
31
-
-
-
-
-
-
1,537
$
-
-
2,203
-
296
992
6
56
1,746
-
5,318
$
$
-
-
-
-
-
-
-
-
-
-
-
255
255
Cash equivalents:
Cash (including foreign currencies)
Short-term investment funds
Equity securities:
Common stock
Depository receipts
Commingled Pension Trust Fund
Preferred stock
Fixed income securities:
Corporate bonds
Government issue
Mortgage-backed securities
Collateralized mortgage obligations
Commingled Pension Trust Fund
Other
Total
The following table sets forth a summary of the changes in the Level 3 assets for the year ended December
31, 2018 and 2017 (in thousands of dollars):
Balance, January 1
Purchase
Unrealized gain (loss)
Balance, December 31
NOTE 9 - INCOME TAXES
The components of the provision for federal income taxes are as follows:
Current
Change in corporate tax rate
Deferred
58
59
2018
255
-
346
601
$
$
2017
$
$
283
-
(28)
255
Years Ended December 31,
2018
2017
(In Thousands)
2,529
-
24
2,553
$
$
$
$
3,822
3,060
(331)
6,551
NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
NOTE 9 - INCOME TAXES (CONTINUED)
Deferred income taxes reflect temporary differences in the recognition of revenue and expenses for tax
reporting and financial statement purposes, principally because certain items, such as, the allowance for loan
losses and loan fees are recognized in different periods for financial reporting and tax return purposes. As of
December 31, 2018, the Company has a $4,970,000 net operating loss carryforward that will begin to expire in
2035. A valuation allowance has not been established for deferred tax assets. Realization of the deferred tax
assets is dependent on generating sufficient taxable income. Although realization is not assured, management
believes it is more likely than not that all of the deferred tax asset will be realized. Deferred tax assets are
recorded in other assets.
Income tax expense of the Company is less than the amounts computed by applying statutory federal
income tax rates to income before income taxes because of the following:
Tax at statutory rates
Tax exempt interest income, net of interest expense disallowance
Incentive stock options
Earnings and proceeds on life insurance
Change in corporate tax rate
Other
Percentage of Income
before Income Taxes
Years Ended December 31,
2018
2017
21.0%
(4.9)
0.2
(1.1)
-
0.6
15.8%
35.0%
(9.6)
0.2
(2.7)
20.8
0.7
44.4%
60
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NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
NOTE 9 - INCOME TAXES (CONTINUED)
The net deferred tax asset included in other assets in the accompanying Consolidated Balance Sheets
includes the following amounts of deferred tax assets and liabilities:
2018
2017
(In Thousands)
Deferred tax assets:
Allowance for loan losses
Deferred compensation
Core deposit intangible
Prepaid expenses
Pension liability
Foreclosed real estate valuation allowance
AMT tax credit carryforward
Net operating loss carryforward
Net unrealized loss on securities
Other
Total Deferred Tax Assets
Deferred tax liabilities:
Premises and equipment
Deferred loan fees
Net unrealized gain on pension liability
Purchase price adjustment
$
$
1,775
766
278
90
263
20
260
1,173
1,477
95
6,197
223
186
43
321
773
Total Deferred Tax Liabilities
$
5,424
1,603
775
232
125
384
7
260
1,249
808
92
5,535
210
142
99
303
754
Net Deferred Tax Asset
$
4,781
The Company’s federal and state income tax returns for taxable years through 2015 have been closed for
purposes of examination by the Internal Revenue Service and the Pennsylvania Department of Revenue.
NOTE 10 - REGULATORY MATTERS AND STOCKHOLDERS’ EQUITY
The Company and Bank are subject to various regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the
Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the
Company’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting
practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the
regulators about components, risk-weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the
Bank to maintain minimum amounts and ratios (set forth in the table below) of Total, Tier 1 and Common
Equity Tier 1 capital (as defined in the regulations) to risk-weighted assets, and of Tier 1 capital to average
assets. Management believes, as of December 31, 2018 and 2017, that the Company and the Bank meet all
capital adequacy requirements to which they are subject.
60
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NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
NOTE 10 - REGULATORY MATTERS AND STOCKHOLDERS’ EQUITY (CONTINUED)
As of December 31, 2018, the most recent notification from the regulators has categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action. There are no conditions or events
since that notification that management believes have changed the Bank’s category.
The Company’s actual capital amounts and ratios are presented in the following table:
Actual
For Capital Adequacy
Purposes
To Be Well Capitalized
under Prompt
Corrective Action
Provisions
As of December 31, 2018:
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Common Equity Tier 1 capital
(to risk-weighted assets)
Tier 1 capital (to average assets)
As of December 31, 2017:
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in Thousands)
$122,917 14.00%
114,465 13.04
≥$70,248 ≥8.00%
≥52,686 ≥6.00
≥$87,810
≥70,248
≥10.00%
≥8.00
114,465 13.04
9.82
114,465
≥39,515 ≥4.50
≥46,619 ≥4.00
≥57,077
≥58,273
≥6.50
≥5.00
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Common Equity Tier 1 capital
$113,091 14.11%
105,457 13.16
≥$64,126
≥48,095
≥8.00%
≥6.00
≥$80,158
≥64,126
≥10.00%
≥8.00
(to risk-weighted assets)
Tier 1 capital (to average assets)
105,457 13.16
9.36
105,457
≥36,071
≥45,075
≥4.50
≥4.00
≥52,103
≥56,343
≥6.50
≥5.00
The Bank’s ratios do not differ significantly from the Company’s ratios presented above.
Effective January 1, 2015, the Company and the Bank became subject to new regulatory capital rules which,
among other things, impose a new common equity Tier 1 minimum capital requirement (4.5% of risk-
weighted assets); set the minimum leverage ratio for all banking organizations at a uniform 4% of total assets;
increased the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted
assets); and assigned a higher risk-weight (150%) to exposures that are more than 90 days past due or are on
nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or
construction of real property. The new rules also require unrealized gains and losses on certain “available-for-
sale” securities holdings to be included for purposes of calculating regulatory capital requirements unless a
one-time opt out is exercised, which the Company and the Bank have done. The final rule limits a banking
organization’s dividends, stock repurchases and other capital distributions, and certain discretionary bonus
payments to executive officers, if the banking organization does not hold a “capital conservation buffer”
consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above regulatory minimum risk-
based requirements. The capital conservation buffer requirements will be phased in beginning January 1,
2016 and ending January 1, 2019, when the full capital conservation buffer will be effective. The Company and
the Bank are in compliance with their respective new capital requirements, including the capital conservation
buffer, as of December 31, 2018.
62
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NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
NOTE 10 - REGULATORY MATTERS AND STOCKHOLDERS’ EQUITY (CONTINUED)
The Bank is required to maintain average cash reserve balances in vault cash or with the Federal Reserve
Bank. The amount of these restricted cash reserve balances at December 31, 2018 and 2017 was
approximately $1,018,000 and $1,111,000, respectively.
Under Pennsylvania banking law, the Bank is subject to certain restrictions on the amount of dividends that
it may declare without prior regulatory approval. At December 31, 2018, $64,886,000 of retained earnings
were available for dividends without prior regulatory approval, subject to the regulatory capital requirements
discussed above. Under Federal Reserve regulations, the Bank is limited as to the amount it may lend affiliates,
including the Company, unless such loans are collateralized by specific obligations.
NOTE 11 - STOCK BASED COMPENSATION
The Company’s shareholders approved the Norwood Financial Corp 2006 Stock Option Plan at the Annual
Meeting on April 26, 2006. An aggregate of 412,500 shares of authorized but unissued Common Stock of the
Company were reserved for future issuance under the Plan. This includes up to 66,000 shares for awards to
outside directors. Under this plan, the Company granted 11,135 options to employees in 2015, 18,750 options
to employees in 2014, and 42,900 options, which included 6,000 options granted to outside directors in 2013.
No options were granted under this plan in 2018 or 2017. As of December 31, 2018, there were no shares
available for future awards under this plan. All share information has been restated to reflect the 50% stock
dividend declared in 2017.
At the Annual Meeting held on April 22, 2014, the Company’s shareholders approved the Norwood Financial
Corp 2014 Equity Incentive Plan. An aggregate of 375,000 shares of authorized but unissued Common Stock of
the Company were reserved for future issuance under the Plan. This includes up to 60,000 shares for awards
to outside directors. The Plan also authorized the Company to award restricted stock to officers and outside
directors, limited to 63,000 shares of restricted stock awards for officers and 12,000 shares of restricted stock
awards for outside directors. At the Annual Meeting held on April 24, 2018, the Company’s shareholders
approved an amendment to the 2014 Equity Incentive Plan to ease certain restrictions on restricted stock
awards to outside directors. As a result of this amendment, the number of shares available for restricted stock
awards to officers was reduced by 300 shares to 62,700, while the number of shares available for restricted
stock awards to outside directors was increased by 20,300 to 32,300 shares. Under this plan, the Company
granted 42,000 shares in 2018 which included 26,500 options to employees, 7,500 shares of restricted stock
to officers, 2,400 options to directors and 5,600 shares of restricted stock to directors. In 2017, the Company
granted 44,150 shares which included 26,750 options to employees, 9,000 shares of restricted stock to
officers, 8,000 options to directors and 400 shares of restricted stock to directors. In 2016, the Company
granted 36,675 shares which included 24,000 options to employees, 9,000 shares of restricted stock to officers
and 3,675 shares of restricted stock to directors. In 2015, the Company granted 20,591 shares which included
10,616 options to employees, 6,375 shares of restricted stock to officers and 3,600 shares of restricted stock to
directors. In 2014, the Company granted 13,950 shares, which included 9,750 shares of restricted stock to
officers and 4,200 shares of restricted stock to outside directors. All shares granted in 2014 were for
restricted stock. The restricted shares vest over a five-year period. The product of the number of shares
granted and the grant date market price of the Company’s common stock determine the fair value of restricted
stock under the company’s restricted stock plan. Management recognizes compensation expense for the fair
value of restricted stock on a straight-line basis over the requisite service period for the entire award. As of
December 31, 2018, there were 217,635 shares available for future awards under this plan, which includes
62
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NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT NOTE 11 - STOCK BASED COMPENSATION (CONTINUED)
185,510 shares available for officer awards and 32,125 shares available for awards to outside directors.
Included in these totals are 21,075 shares available for restricted stock awards to officers and 14,825 shares
available for restricted stock awards to outside directors. All share information has been restated to reflect
the 50% stock dividend declared in 2017.
Total unrecognized compensation cost related to stock options was $207,000 as of December 31, 2018
and $237,000 as of December 31, 2017. Salaries and employee benefits expense includes $237,000 and
$93,000 of compensation costs related to options for the years ended December 31, 2018 and 2017,
respectively. Compensation costs related to restricted stock amounted to $205,000 and $143,000 for the
years ended December 31, 2018 and 2017, respectively. The expected future compensation expense
relating to non-vested restricted stock outstanding as of December 31, 2018 and 2017 was $963,000
and $744,000, respectively. Net income was reduced by $388,000 and $187,000 for the years ended
December 31, 2018 and 2017, respectively.
A summary of the Company’s stock option activity and related information for the years ended
December 31 follows:
2018
Weighted
Average
Exercise
Price
Average
Intrinsic
Value
Options
2017
Weighted
Average
Exercise
Price
Average
Intrinsic
Value
Options
212,725
28,900
(28,275)
(4,650)
208,700
Outstanding,
beginning of year
Granted
Exercised
Forfeited
Outstanding, end of year
179,800
$
$
$
20.76
32.34
18.39
27.08
22.54
$ 2,182,537
225,669
34,750
(44,219)
(3,475)
20.97
$ 2,163,463
212,725
$
$
$
19.46
32.81
23.53
21.71
20.76 $ 2,604,097
18.41 $ 2,597,494
Exercisable, end of year
177,975
Exercise prices for options outstanding as of December 31, 2018 ranged from $16.65 to $32.81 per share.
The weighted average remaining contractual life is 5.9 years.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions:
Dividend yield
Expected life
Expected volatility
Risk-free interest rate
Weighted average fair value of options granted
2017
Years Ended December 31,
2018
3.72%
10 years
29.10%
2.68%
$7.18
3.89%
10 years
29.11%
2.41%
$6.83
64
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NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
NOTE 11 - STOCK BASED COMPENSATION (CONTINUED)
The expected volatility is based on historical volatility. The risk-free interest rates for periods within the
contractual life of the awards are based on the U.S. Treasury yield curve in effect at the time of the grant.
The expected life is based on historical exercise experience. The dividend yield assumption is based on the
Company’s history and expectation of dividend payouts.
Proceeds from stock option exercises totaled $520,000 in 2018. Shares issued in connection with stock
option exercises are issued from available treasury shares or from available authorized shares. During 2018,
for the shares issued in connection with stock option exercises, 28,275 shares in total, 25,950 shares were
issued from available authorized shares, while the remaining 2,325 shares were issued from available treasury
shares. All share information has been adjusted to reflect the 50% stock dividend declared in 2017.
As of December 31, 2018, outstanding stock options consist of the following:
Remaining
Life, Years
Options
Outstanding
Average
Exercise
Price
14,775
14,025
18,825
26,400
1,650
3,000
25,375
12,000
13,500
18,500
31,750
28,900
Total 208,700
$
17.33
16.83
16.65
18.03
18.36
19.30
17.93
19.39
19.03
22.37
32.81
32.34
1.0
2.0
3.0
4.0
4.0
4.8
5.0
5.9
6.9
8.0
9.0
10.0
$
Average
Exercise
Price
17.33
16.83
16.65
18.03
18.36
19.30
17.93
19.39
19.03
22.37
32.81
-
Options
Exercisable
14,775
14,025
18,825
26,400
1,650
3,000
25,375
12,000
13,500
18,500
31,750
-
179,800
A summary of the Company’s restricted stock activity and related information for the years ended
December 31 is as follows:
2018
2017
Weighted
Average
Grant Date
Fair Value
24.46
32.34
23.00
Number
of Shares
30,415
13,100
(8,900)
$
34,615
-
$
27.82
.0-
Weighted
Average
Grant Date
Fair Value
Number
of Shares
28,035
9,400
(7,020)
-
30,415
$
$
20.64
32.81
20.37
-
24.46
Non-vested, beginning of year
Granted
Vested
Forfeited
Non-vested at December 31
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NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
NOTE 12 - EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted earnings per share:
Years Ended December 31,
Numerator, net income
Denominator:
Weighted average shares outstanding
Less: Weighted average unvested restricted shares
Denominator: Basic earnings per share
Weighted average shares outstanding, basic
Add: Dilutive effect of stock options
Denominator: Diluted earnings per share
Basic earnings per common share
Diluted earnings per common share
2018
2017
(In Thousands, Except
Per Share Data)
$
13,651
$
8,198
6,263
(31)
6,232
6,232
58
6,290
$
2.19
$
2.17
6,238
(28)
6,210
6,210
61
6,271
$
$
1.32
1.31
Stock options which had no intrinsic value because their effect would be anti-dilutive, and therefore would
not be included in the diluted EPS calculation, were zero for both years ended December 31, 2018 and 2017,
based on the closing price of the Company’s common stock, which was $33.00 as of December 31, 2018 and
2017. All share and per share information has been restated to reflect the 50% stock dividend declared in 2017.
NOTE 13 - OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to
meet the financing needs of its customers. These financial instruments include commitments to extend credit
and letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the balance sheets.
The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial
instrument for commitments to extend credit and letters of credit is represented by the contractual amount of
those instruments. The Bank uses the same credit policies in making commitments and conditional obligations
as it does for on-balance sheet instruments.
A summary of the Bank’s financial instrument commitments is as follows:
Commitments to grant loans
Unfunded commitments under lines of credit
Standby letters of credit
December 31,
2018
2017
(In Thousands)
$
45,246
71,906
4,269
$ 121,421
$
$
44,970
62,228
5,919
113,117
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NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
NOTE 13 - OFF-BALANCE SHEET FINANCIAL INSTRUMENTS (CONTINUED)
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since some of the commitments are expected to expire without
being drawn upon, the total commitment amount does not necessarily represent future cash requirements.
The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit
evaluation of the customer and generally consists of real estate.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a
customer to a third party. The majority of these standby letters of credit expire within the next twelve months.
The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other
loan commitments. The Bank requires collateral supporting these letters of credit when deemed necessary.
Management believes that the proceeds obtained through a liquidation of such collateral would be sufficient to
cover the maximum potential amount of future payments required under the corresponding guarantees.
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price)
in the principal or most advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. In accordance with fair value accounting guidance, the
Company measures, records, and reports various types of assets and liabilities at fair value on either a
recurring or non-recurring basis in the Consolidated Financial Statements. Those assets and liabilities are
presented in the sections entitled “Assets and Liabilities Required to be Measured and Reported at Fair Value
on a Recurring Basis” and “Assets and Liabilities Required to be Measured and Reported at Fair Value on a
Non-Recurring Basis”. There are three levels of inputs that may be used to measure fair values:
Level 1:
Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity
Level 2:
has the ability to access as of the measurement date.
Significant other observable inputs other than Level 1 prices such as quoted prices for
Level 3:
similar assets or liabilities; quoted prices in markets that are not active; or other inputs that
are observable or can be corroborated by observable market data.
Significant unobservable inputs that reflect a company’s own assumptions about the
assumptions that market participants would use in pricing an asset or liability.
The methods of determining the fair value of assets and liabilities presented in this note are consistent
with our methodologies disclosed in Note 14 of the Company’s 2017 Form 10-K, except for the valuation
of loans which was impacted by the adoption of ASU 2016-01. In accordance with ASU 2016-01, the fair
value of loans, excluding previously presented impaired loans measured at fair value on a non-recurring
basis, is estimated using discounted cash flow analyses. The discount rates used to determine fair value use
interest rate spreads that reflect factors such as liquidity, credit and nonperformance risk. Loans are
considered a Level 3 classification.
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NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
ASSETS AND LIABILITIES REQUIRED TO BE MEASURED AND REPORTED
AT FAIR VALUE ON A RECURRING BASIS
For financial assets measured at fair value on a recurring basis, the fair value measurements by level within
the fair value hierarchy used at December 31, 2018 and 2017 are as follows (in thousands):
Fair Value Measurement Reporting Date using
Description
December 31, 2018
Total
Level 1
Level 2
Level 3
Available for Sale:
States and political subdivision
Corporate obligations
Mortgage-backed securities-government
sponsored entities
Total available for sale
December 31, 2017
Available for Sale:
U.S. Treasury securities
States and political subdivisions
Corporate obligations
Mortgage-backed securities-government
sponsored entities
Total available for sale
Securities:
$
$
$
$
97,613
8,640
137,024
243,277
1,998
120,478
9,989
148,656
281,121
$
$
$
$
-
-
-
-
-
-
-
-
-
$
$
$
$
97,613
8,640
137,024
243,277
1,998
120,478
9,989
148,656
281,121
$
$
$
$
-
-
-
-
-
-
-
-
-
The fair value of securities available for sale (carried at fair value) are determined by obtaining quoted
market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a
mathematical technique used widely in the industry to value debt securities without relying exclusively on
quoted market prices for the specific securities, but rather by relying on the securities’ relationship to other
benchmark quoted prices. For certain securities which are not traded in active markets or are subject to
transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such
adjustments are generally based on available market evidence (Level 3). In the absence of such evidence,
management’s best estimate is used. Management’s best estimate consists of both internal and external
support on certain Level 3 investments. Internal cash flow models using a present value formula that includes
assumptions market participants would use along with indicative exit pricing obtained from broker/dealers
(where available) are used to support fair values of certain Level 3 investments, if applicable.
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NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
ASSETS AND LIABILITIES REQUIRED TO BE MEASURED AND REPORTED
AT FAIR VALUE ON A NON-RECURRING BASIS
For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level
within the fair value hierarchy used at December 31, 2018 and 2017 are as follows (in thousands):
Total
Description
Fair Value Measurement Reporting Date using
Level 2
Level 1
Level 3
December 31, 2018
Impaired Loans
Foreclosed real estate
December 31, 2017
$
1,319
1,115
Impaired Loans
Foreclosed real estate
Impaired loans (generally carried at fair value):
$
1,247
1,661
$
$
$
$
-
-
-
-
-
-
-
-
$
1,319
1,115
$
1,247
1,661
The Company measures impairment generally based on the fair value of the loan’s collateral. Fair value is
generally determined based upon independent third-party appraisals of the properties, or discounted cash
flows based upon the lowest level of input that is significant to the fair value measurements.
As of December 31, 2018, the fair value investment in impaired loans totaled $1,319,000 which included six
loan relationships that did not require a valuation allowance since either the estimated realizable value of the
collateral or the discounted cash flows exceeded the recorded investment in the loan. As of December 31,
2018, the Company has recognized charge-offs against the allowance for loan losses on these impaired loans in
the amount of $428,000 over the life of the loans.
As of December 31, 2017, the fair value investment in impaired loans totaled $1,247,000 which included
five loans which did not require a valuation allowance since the estimated realizable value of the collateral
exceeded the recorded investment in the loan. As of December 31, 2017, the Company had recognized
charge-offs against the allowance for loan losses on these impaired loans in the amount of $277,000 over
the life of the loans.
Foreclosed real estate owned (carried at fair value):
Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are carried at fair
value less estimated cost to sell. Fair value is based upon independent market prices, appraised value of the
collateral or management’s estimation of the value of the collateral. These assets are included in Level 3 fair
value based upon the lowest level of input that is significant to the fair value measurement.
68
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NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The following tables present additional quantitative information about assets measured at fair value on a
nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value:
Quantitative Information about Level 3 Fair Value Measurements
December 31, 2018
(In thousands)
Impaired loans
Impaired loans
Foreclosed real estate owned
December 31, 2017
(In thousands)
Impaired loans
Impaired loans
Fair Value
Estimate
232
$
Valuation
Techniques
Unobservable
Input
Range
(Weighted Average)
10.00-81.54%
(56.06%)
$
1,087
Appraisal of
collateral(1)
Appraisal
adjustments(2)
4.00-6.00% (5.80%)
Present value of Loan
future cash flows discount rate
0%
$
1,115
Appraisal of
collateral(1)
Probability
of default
Liquidation
Expenses(2)
7.00-85.71% (7.80%)
Quantitative Information about Level 3 Fair Value Measurements
Fair Value
Estimate
Valuation
Techniques
Unobservable
Input
Range
(Weighted Average)
$
131
Appraisal
of collateral(1)
Appraisal
adjustments(2)
10% (10%)
$
1,116
Present value of Loan
future cash flows discount rate
4-5.25% (5.11%)
Probability
of default
0%
Foreclosed real estate owned
$
1,661
Appraisal of
collateral(1)
Liquidation
Expenses(2)
0-42.60% (14.68%)
(1) Fair value is generally determined through independent appraisals of the underlying collateral, which
generally include various Level 3 inputs which are not identifiable, less any associated allowance.
(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and
estimated liquidation expenses. The range and weighted average of liquidation expenses and other
appraisal adjustments are presented as a percent of the appraisal.
70
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NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
ASSETS AND LIABILITIES NOT REQUIRED TO BE MEASURED OR REPORTED AT FAIR VALUE
The following information should not be interpreted as an estimate of the fair value of the entire Company
since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities.
Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates,
comparisons between the Company’s disclosures and those of other companies may not be meaningful.
The following methods and assumptions were used to estimate the fair values of the Company’s financial
instruments at December 31, 2018 and 2017.
Cash and cash equivalents (carried at cost):
The carrying amounts reported in the consolidated balance sheet for cash and short-term instruments
approximate those assets’ fair values.
Loans receivable (carried at cost):
The fair values of loans are estimated using discounted cash flow analyses, using market rates at the balance
sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are
calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal.
Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair
values are based on carrying values.
Mortgage servicing rights (generally carried at cost)
The Company utilizes a third party provider to estimate the fair value of certain loan servicing rights.
Fair value for the purpose of this measurement is defined as the amount at which the asset could be
exchanged in a current transaction between willing parties, other than in a forced liquidation.
Restricted investment in Federal Home Loan Bank stock (carried at cost):
The Bank, as a member of the Federal Home Loan Bank (FHLB) system, is required to maintain an
investment in capital stock of its district FHLB according to a predetermined formula. This regulatory stock
has no quoted market value and is carried at cost.
Bank owned life insurance (carried at cost):
The fair value is equal to the cash surrender value of the Bank owned life insurance.
Accrued interest receivable and payable (carried at cost):
The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.
Deposit liabilities (carried at cost):
The fair values disclosed for demand deposits (e.g., interest and noninterest checking, savings and money
market accounts) are, by definition, equal to the amount payable on demand at the reporting date
(i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently being offered in the market on certificates to a
schedule of aggregated expected monthly maturities on time deposits.
70
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NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
Short-term borrowings (carried at cost):
The carrying amounts of short-term borrowings approximate their fair values.
Other borrowings (carried at cost):
Fair values of FHLB advances are estimated using discounted cash flow analysis, based on quoted prices for
new FHLB advances with similar credit risk characteristics, terms and remaining maturity. These prices
obtained from this active market represent a fair value that is deemed to represent the transfer price if the
liability were assumed by a third party.
Off-balance sheet financial instruments (disclosed at cost):
Fair values for the Company’s off-balance sheet financial instruments (lending commitments and letters of
credit) are based on fees currently charged in the market to enter into similar agreements, taking into account,
the remaining terms of the agreements and the counterparties’ credit standing.
72
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NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Bank’s financial instruments not required to be measured or reported at fair
value were as follows at December 31, 2018 and December 31, 2017. (In thousands):
Fair Value Measurements at December 31, 2018
Financial assets:
Cash and cash equivalents (1)
Loans receivable, net
Mortgage servicing rights
Regulatory stock (1)
Bank owned life insurance (1)
Accrued interest receivable (1)
Financial liabilities:
Deposits
Short-term borrowings (1)
Other borrowings
Off-balance sheet financial instruments:
Accrued interest payable (1)
Commitments to extend credit and
outstanding letters of credit
Financial assets:
Cash and cash equivalents (1)
Loans receivable, net
Mortgage servicing rights
Regulatory stock (1)
Bank owned life insurance (1)
Accrued interest receivable (1)
Financial liabilities:
Carrying
Amount
Fair Value
Level 1
Level 2
Level 3
$
$ 18,348 $ 18,348
840,134
841,730
178
220
3,926
3,926
37,932
37,932
3,776
3,776
$
18,348
-
-
3,926
37,932
3,776
946,780
53,046
52,284
1,806
945,773
53,046
52,043
1,806
601,604
53,046
-
1,806
-
-
-
-
-
-
-
-
-
-
$
-
840,134
220
-
-
-
344,169
-
52,043
-
Fair Value Measurements at December 31, 2017
-
Carrying
Amount
Fair Value
Level 1
Level 2
-
-
-
-
Level 3
$
16,697 $
756,458
200
3,505
37,060
3,716
$
16,697
756,092
223
3,505
37,060
3,716
$
16,697
-
-
3,505
37,060
3,716
Deposits
Short-term borrowings (1)
Other borrowings
Accrued interest payable (1)
Off-balance sheet financial instruments:
929,384
42,530
35,945
1,434
929,709
42,530
35,514
1,434
609,090
42,530
-
1,434
Commitments to extend credit
and outstanding letters of credit
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
-
756,092
223
-
-
-
320,619
-
35,514
-
-
(1) This financial instrument is carried at cost, which approximates the fair value of the instrument.
72
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NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
NOTE 15 – ACCUMULATED OTHER COMPREHENSIVE LOSS
The following tables present the changes in accumulated other comprehensive income (loss) (in thousands)
by component, net of tax, for the years ended December 31, 2018 and 2017:
Unrealized gains
(losses) on
available for sale
(3,041)
$
securities (a)
Unrealized gain (loss)
on pension liability (a)
374
$
Balance as of December 31, 2017
Other comprehensive income (loss)
before reclassification
Amount reclassified from accumulated
other comprehensive loss
Total other comprehensive loss
Balance as of December 31, 2018
(2,349)
(168)
(2,517)
(5,558)
$
164
-
164
538
$
$
(2,667)
Total (a)
(2,185)
(168)
(2,353)
(5,020)
$
Balance as of December 31, 2016
Other comprehensive income (loss)
before reclassification
Amount reclassified from accumulated
other comprehensive loss
Total other comprehensive income
Reclassification of certain income
tax effects from accumulated
other comprehensive loss
Balance as of December 31, 2017
Unrealized gains
(losses) on
available for sale
securities (a)
Unrealized gain (loss)
on pension liability (a)
Total (a)
$
(4,437)
$
318
$
(4,119)
2,127
(230)
1,897
(11)
-
(11)
2,116
(230)
1,886
$
(501)
(3,041)
$
67
374
$
(434)
(2,667)
(a) All amounts are net of tax. Amounts in parentheses indicate debits.
The following table presents significant amounts reclassified out of each component of accumulated other
comprehensive income (loss) (in thousands) for the years ended December 31, 2018 and 2017:
Details about other
comprehensive income
Amount Reclassified
From Accumulated
Other Comprehensive
Income (Loss) (a)
Twelve
months ended
2018
December 31,
Twelve
months ended
2017
December 31,
Affected Line Item in
the Consolidated
Statement of Income
Unrealized gains on available
for sale securities
$
$
213
(45)
168
(a) Amounts in parentheses indicate debits to net income.
$
$
348
Net realized gains on sales of securities
(118) Income tax expense
230
74
75
NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
NOTE 16 - NORWOOD FINANCIAL CORP (PARENT COMPANY ONLY) FINANCIAL INFORMATION
BALANCE SHEETS
December 31,
2018
2017
(In Thousands)
ASSETS
Cash on deposit in bank subsidiary
Investment in bank subsidiary
Other assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Total assets
Liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
STATEMENTS OF INCOME
Income:
Dividends from bank subsidiary
Net realized gain on sales of securities
Other interest income
Expenses
Income tax benefit
Net Income
Equity in undistributed earnings of subsidiary
Comprehensive Income
STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to
net cash provided by operating activities:
Undistributed earnings of bank subsidiary
Net gains on sales of securities
Decrease in deferred income tax
Other, net
Net Cash Provided by Operating Activities
CASH FLOWS FROM INVESTING ACTIVITIES
Net Cash (Used in) Provided by Investing Activities
Investment in bank subsidiary
Proceeds from sales of securities
CASH FLOWS FROM FINANCING ACTIVITIES
Stock options exercised
Sale of treasury stock for ESOP
Acquisition of treasury stock
Cash dividends paid
Net Cash Used in Financing Activities
Net (Decrease) Increase in Cash and Cash Equivalents
CASH AND CASH EQUIVALENTS - BEGINNING
CASH AND CASH EQUIVALENTS - ENDING
74
75
$
$
$
$
2,509
120,511
1,739
124,759
2,474
122,285
124,759
$
$
$
4,782
110,218
2,858
117,858
2,119
115,739
117,858
2017
Years Ended December 31,
$
2018
(In Thousands)
$
5,643
-
$
5,643
618
-
5,025
(217)
5,242
8,409
13,651
11,298
$
$
$
$
5,412
130
8
5,550
511
5,039
(127)
5,166
3,032
8,198
10,084
Years Ended December 31,
2018
2017
(In Thousands)
$
13,651
$
8,198
(8,409)
-
1,158
387
6,787
(4,000)
-
(4,000)
520
123
(194)
(5,509
(5,060)
(2,273)
)
4,782
2,509
$
$
(3,032)
(130)
1,736
389
7,161
-
422
422
1,040
127
(1,587)
(5,386)
(5,806)
1,777
3,005
4,782
NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORTNORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
INVESTOR INFORMATION
STOCK LISTING
Norwood Financial Corp stock is traded on the Nasdaq Global Market under the symbol NWFL. The
following firms are known to make a market in the Company’s stock:
Boenning & Scattergood, Inc.
RBC Capital Markets
West Conshohocken, PA 19428
800-883-1212
Janney Montgomery Scott, LLC
Philadelphia, PA 19103
888-848-4677
Stifel Nicolaus
Scranton, PA 18503
800-638-4417
TRANSFER AGENT
St. Louis, MO 63102
314-342-2000
Computershare provides Transfer Agent services for the Company. Stockholders who may have questions
regarding their stock ownership should contact the Transfer Agent at 800-662-7232, by regular mail at P.O.
Box 50500, Louisville, KY 40233-5000, or by overnight delivery at 462 South 4th Street Suite 1600, Louisville,
KY 40202.
DIVIDEND CALENDAR
Dividends on Norwood Financial Corp common stock, if approved by the Board of Directors, are customarily
paid on or about February 1, May 1, August 1 and November 1.
AUTOMATIC DIVIDEND REINVESTMENT PLAN
The Plan, open to all shareholders, provides the opportunity to have dividends automatically reinvested into
Norwood stock. Participants in the Plan may also elect to make cash contributions to purchase additional
shares of common stock. Please contact the transfer agent for additional information.
SEC REPORTS AND ADDITIONAL INFORMATION
A copy of the Company’s annual report on Form 10-K for its fiscal year ended December 31, 2018
including financial statements and schedules thereto, required to be filed with the Securities and
Exchange Commission is available on the Company’s website at www.waynebank.com under the
Stockholder Services tab. A copy of the report may be obtained upon written request of any
stockholder, investor or analyst by contacting William S. Lance, Executive Vice President, Chief
Financial Officer and Secretary, Norwood Financial Corp., 717 Main Street, PO Box 269, Honesdale, PA
18431, 570-253-1455.
76
NORWOOD FINANCIAL CORP - 2018 CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP
NORWOOD FINANCIAL CORP
SUMMARY OF SELE CTE D F IN ANCI AL DATA
DIRECTORY OF OF FICERS
(dollars in thousands except per share data)
FOR THE YEARS ENDED DECEMBER 31,
2018
2017
2016
2015
2014
Net interest income
Provision for loan losses
Other income
Net realized gains on sales of loans and securities
$36,839
$34,908
$28,590
$24,521
$24,560
1,725
2,200
2,050
4,580
1,680
6,837
228
6,496
415
4,841
3,969
338
730
3,940
1,170
Other expenses
25,975
24,870
23,124
17,100
17,727
Income before income taxes
16,204
14,749
Income tax expense
2,553
6,551
8,595
1,884
7,540
1,632
10,263
2,606
NET INCOME
Net income per share -Basic*
-Diluted*
Cash dividends declared*
Dividend pay-out ratio
Return on average assets
Return on average equity
BALANCES AT YEAR-END
Total assets
Loans receivable
$13,651
$8,198
$6,711
$5,908
$7,657
$2.19
$2.17
$0.90
$1.32
$1.31
$0.87
$1.16
$1.15
$0.83
$1.07
$1.07
$0.83
$1.40
$1.40
$0.80
41.10%
65.91%
71.84%
77.50%
57.14%
1.19%
11.71%
0.73%
7.04%
0.74%
6.17%
0.80%
5.83%
1.08%
7.92%
$1,184,559
$1,132,916
$1,111,183
$750,505
$711,635
850,182
764,092
713,889
559,925
501,135
Allowance for loan losses
8,452
7,634
6,463
7,298
5,875
Total deposits
Stockholders’ equity
946,780
929,384
925,385
550,909
559,944
122,285
115,739
111,079
100,998
99,041
Trust assets under management
151,224
157,838
138,167
131,690
134,888
Book value per share*
$19.43
$18.61
$17.43
$18.26
$17.53
Tier 1 Capital to risk-adjusted assets
13.04%
13.16%
13.27%
15.86%
17.33%
Total Capital to risk-adjusted assets
14.00%
14.11%
14.12%
17.09%
18.49%
Allowance for loan losses to total loans
Non-performing assets to total assets
0.99%
0.19%
1.00%
0.37%
0.91%
0.64%
1.30%
1.33%
1.17%
1.31%
*Per share information has been restated to reflect the 50% stock dividend declared in 2017.
NORWOOD FINANCIAL CORP
William W. Davis, Jr. ............................. Chairman of the Board
Dr. Andrew A. Forte ........................ Vice Chairman of the Board
Lewis J. Critelli ................... President & Chief Executive Officer
William S. Lance ...............................Executive Vice President,
Chief Financial Officer & Secretary
James F. Burke ...................................Executive Vice President
John F. Carmody .................................Executive Vice President
Robert J. Mancuso ..............................Executive Vice President
John H. Sanders ..................................... Senior Vice President
WAYNE BANK
William W. Davis, Jr. ............................. Chairman of the Board
Dr. Andrew A. Forte ........................ Vice Chairman of the Board
Lewis J. Critelli ................... President & Chief Executive Officer
William S. Lance ...............................Executive Vice President,
Chief Financial Officer & Secretary
James F. Burke ..................................Executive Vice President,
Chief Lending Officer
John F. Carmody ................................Executive Vice President,
Chief Credit Officer
Robert J. Mancuso .............................Executive Vice President,
Chief Operating Officer
Ryan J. French ..................................... Senior Vice President,
Director of Human Resources
John H. Sanders .................................... Senior Vice President,
Retail Lending Manager
Diane M. Wylam ........Senior Vice President, Senior Trust Officer
Thomas A. Byrne .................................... Senior Vice President
Joseph A. Castrogiovanni ........................ Senior Vice President
Kenneth C. Doolittle ............................... Senior Vice President
John Ford .............................................. Senior Vice President
Nancy A. Hart ........................ Senior Vice President, Controller
& Assistant Secretary
Dawnette Hotaling .................................. Senior Vice President
Linda D. Mader ...................................... Senior Vice President
Vincent O’Bell ........................................ Senior Vice President
F. Jeffrey Reimer .................................... Senior Vice President
Eli T. Tomlinson ..................................... Senior Vice President
John Veleber .......................................... Senior Vice President
Barbara A. Ridd .................Vice President & Assistant Secretary
Robert J. Behrens, Jr. ........................................ Vice President
Pilar Cueva ...................................................... Vice President
Steven R. Daniels ............................................. Vice President
Karen R. Gasper ............................................... Vice President
Amanda Hall .................................................... Vice President
Jill A. Hessling ................................................. Vice President
John E. Koczwara ............................................. Vice President
Julie R. Kuen .................................................. Vice President
Colleen Osterhout ............................................. Vice President
Richard A. Siarniak ........................................... Vice President
Frank J. Sislo ................................................... Vice President
Kara R. Suchy .................................................. Vice President
Gerald J. Arnese ................................. Assistant Vice President
Douglas W. Atherton ............................ Assistant Vice President
Derek Bellinger ................................... Assistant Vice President
Teresa Hynes ...................................... Assistant Vice President
Vonnie Lewis ...................................... Assistant Vice President
Bonnie Lockett ................................... Assistant Vice President
Kristine Malti ..................................... Assistant Vice President
Eileen Mershon .................................. Assistant Vice President
Gerry Moore ....................................... Assistant Vice President
Christine Routledge ............................ Assistant Vice President
Robert Sebastianelli ............................ Assistant Vice President
Michele Bailey................................ Community Office Manager
Karen Beissel ................................. Community Office Manager
Nicole Folina .................................. Community Office Manager
Craig D. Grimm .............................. Community Office Manager
Timothy Gutliph .............................. Community Office Manager
Sandra C. Mruczkewycz ................... Community Office Manager
Madeline Portugal ........................... Community Office Manager
AnnaMae Rechtorovic ..................... Community Office Manager
Debra Renwick ............................... Community Office Manager
Elaine Reuthe ................................ Community Office Manager
Jessica Santiago ............................. Community Office Manager
Denise Seman ................................ Community Office Manager
Julie Shenyo .................................. Community Office Manager
Tanyia Vannatta .............................. Community Office Manager
Cheryl Wilkerson ............................. Community Office Manager
Krystin Woodcock ........................... Community Office Manager
Laurie J. Bishop ............... Assistant Community Office Manager
Kimberly Crellin .............. Assistant Community Office Manager
Denise R. Kern ................. Assistant Community Office Manager
Joelyn Lee........................ Assistant Community Office Manager
Barbara Medwynter ........... Assistant Community Office Manager
Wendy Olsen .................... Assistant Community Office Manager
Diane L. Richter ............... Assistant Community Office Manager
Stacey Stephenson ........... Assistant Community Office Manager
John Baker .................................................. Network Manager
Ronald DePasquale ........................................ Facilities Officer
Tracy Goodrich ................................................ Training Officer
Annette Jurkowski ................. Assistant BSA/Compliance Officer
Marianne McConeghy ........................... Trust Operations Officer
Linda A. Meskey ................................................Credit Analyst
Amanda R. Miller .......Commercial Loan Documentation Officer
Jamie Padula ..............Human Resources Administrative Officer
Kathryn A. Serniak ................................. Mortgage Loan Officer
Briana Scholl ......................................Credit Analyst Manager
Gary Steich ..................................... Resource Recovery Officer
Bonnie Rutledge .................................... Assistant Trust Officer
NORWOOD INVESTMENT CORP
Lewis J. Critelli ................... President & Chief Executive Officer
William S. Lance .....................................................Treasurer
Scott C. Rickard .............. Investment Executive, LPL Financial
MONROE COUNTY ASSOCIATE BOARD
Michael J. Baxter
Sara Cramer
Dr. Andrew A. Forte
Ralph A. Matergia, Esq.
James H. Ott
Marvin Papillon
Ray Price
Ron Sarajian
NORWOOD FINANCIAL CORP
WWW.WAYNEBANK.COM
2018 | CONSOLIDATED FINANCIAL REPORT
NORWOOD FINANCIAL CORP
N
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...WE ARE PLEASED TO HAVE ACCOMPLISHED
THE GOALS WE SET FOR 2018 AND CONTINUED
OUR TRADITION OF BEING A PILLAR IN THE
COMMUNITIES WE SERVE THIS YEAR.
LEWIS J. CRITELLI
President and CEO
DEAR STOCKHOLDERS,
We are pleased to share with you the Company’s performance and
Wayne Bank employs over 200 local people who are passionate about
achievements in this Annual Report. Your Company had a very
helping their communities grow, and their efforts have resulted in
productive year with a record level of earnings, 11.3% growth in loans,
record growth across our organization. In 2018, our in-office network
improvement in credit quality metrics and enhancements in operating
generated almost 1,200 mortgage, home equity, and other personal
efficiencies. We also increased our cash dividend in the fourth quarter
loans totaling $50 million, our business lending division originated
of 2018, 9.1% as compared to the fourth quarter of 2017. This
over $100 million in commercial loans, and our dealer center
marks 26 consecutive years of an increase in the Company’s cash
produced auto loans totaling $63 million.
dividend, truly an impressive record. In addition, we opened our new
community office in Roscoe, NY, announced plans to establish our
first office in Luzerne County, PA and enhanced our various electronic
banking channels.
One of the year’s achievements was the relocation of the Bank’s
Roscoe Community Office. In May, the Roscoe staff moved into
their freshly renovated office, conveniently located across the street
from the old location. The new Roscoe Community Office also offers
For the year ended December 31, 2018, the Company earned a
improved parking, enhanced visibility, and exciting technological
record $13,651,000, an increase of $5,453,000 or 66.5% from
upgrades. The move has been an extremely positive one and a grand
the $8,198,000 earned in the prior year. The increase reflects
opening event and ribbon cutting was held in August to celebrate.
improvement in net interest income and other income, as well as a
reduction in the provision for loan losses. Income tax expense was
reduced $3,998,000 due to the non-recurring expense recognized
in 2017 combined with the impact of the reduced corporate tax
rate, both which were the result of the Tax Cuts and Jobs Act. In
2018, income before tax improved $1,455,000 or 9.9%. For the
year, earnings per share on a fully diluted basis were $2.17 for 2018
compared to $1.31 in 2017. The return on average assets for the
year was 1.19% with a return on average equity of 11.71% compared
to 0.73% and 7.04%, respectively, in 2017. Total assets were $1.2
Expansion has been a positive theme throughout Wayne Bank’s
history, and in 2018, the exciting decision was made to expand
into Luzerne County, Pennsylvania. Regulatory approval was received
to establish a new, full-service Community Office in Hanover
Township, marking the bank’s entry into the Luzerne County
marketplace. This expansion will offer new market opportunities
for both deposit gathering and lending facilities, particularly in our
commercial lending division. The new Community Office is slated
to open during the Second Quarter of 2019.
billion as of December 31, 2018. Loans receivable increased $86.1
Our electronic banking platform has continued to evolve and now
million to total $850.2 million as of December 31, 2018, with
offers customers a full suite of products and services to allow for
total deposits of $946.8 million and stockholders’ equity of $122.3
banking from anywhere. At the end of the fourth quarter, Online
million. I encourage you to read The Management’s Discussion and
Banking users totaled almost 15,000, Mobile Banking was enjoyed
Analysis and the Financial Statements with Footnotes for a full report
by over 20,500 customers, 3,900 individuals and businesses were
using Mobile Deposit Capture, and over 9,700 deposit customers were
enrolled for eStatements.
on our performance.
Founded in 1871, Wayne Bank celebrated 147 years of community
banking in 2018. Thanks to the dedication of our employees, the
loyalty of our customers, and the support of our local communities,
we are pleased to have accomplished the goals we set for 2018 and
continued our tradition of being a pillar in the communities we serve
this year.
Our 25 Community Offices serve the people of Northeastern
Pennsylvania and the Southern Tier of New York throughout six
counties. Although these counties are each very geographically and
demographically unique, they are all comprised of communities
made up of hard-working residents, friendly neighborhoods, exciting
businesses, enriching schools, and vital organizations. Wayne Bank is
proud to be an important part of each of these wonderful communities.
147 YEARS IN BUSINESS, WITH
25 COMMUNITY OFFICES AND
OVER 200 EMPLOYEES.
WWW.WAYNEBAN K.COM
2018 | A NNUA L RE PO RT
COMING SOON IN 2019 — HANOVER TOWNSHIP, PA
WAYNEBANK.COM
Shohola, PA
Milford, PA
PIKE COUNTY
Tannersville, PA
Stroud Mall (Stroudsburg), PA
Marshalls Creek, PA
Effort, PA
MONROE COUNTY
Clarks Summit, PA
Central Scranton, PA
LACKAWANNA COUNTY
Wurtsboro, NY
Roscoe, NY
Narrowsburg, NY
Monticello, NY
Liberty, NY
Callicoon, NY
SULLIVAN COUNTY
Walton, NY
Roxbury, NY
Hamden, NY
Franklin, NY
Andes, NY
DELAWARE COUNTY
Stamford, NY
Willow Avenue (Honesdale), PA
Waymart, PA
Lakewood, PA
Honesdale, PA
Hawley, PA
WAYNE COUNTY